Strategic Investment

A Journey to the Sunny Side
of the Leverage Cycle:
Opportunity in Brazil

By James Dale Davidson

“If you look at all the facts, I don’t think there is a better environment in all the world than Brazil.” – Sam Zell, property guru and billionaire

Rio de Janeiro – I recently conducted a personal survey of the dynamic state of Brazil’s consumer economy and its prospects for early recovery from the current world depression.

How?

I began with an investigation of Brazil’s high-end shopping malls. I first headed for Belo Horizonte, an important industrial metropolis in Minas Gerais, a south-eastern Brazilian state that is larger than France. I then made my way to Rio de Janeiro, the cosmopolitan city famous for its carnaval that stretches along the white-sand beaches of the Atlantic coast.

I was first struck by the formidable traffic jams that blocked access to Brazil’s malls. In Belo Horizonte cars lined up for blocks outside the mall entrance. The jam was so large, and began so far before the entrances to the mall, that I assumed we were caught behind a traffic accident. In Rio the traffic jams were less startling because more shoppers arrived by taxi. Parking spaces were at a premium, however, in both cities.

I don’t pretend to be a great expert in the anthropology of shopping malls. But I did notice distinctive differences between the scenes in Brazilian malls and those in the malls I have been to recently in the US. For example, I saw no empty shops and no closed and boarded outlets in Brazil. This should come as no surprise: household consumption in Brazil rose 5.4% between October and January – the worst days of the world economic crisis.

I found it fascinating to sit and watch the eager Brazilian consumers go about their business. I amused myself by comparing the scene to what one would see in a high-end mall in the US, such as the Tysons Corner Center in Virginia.

I tried to spot the visual cues that these were Brazilian shoppers, not Americans. Of course, Brazil’s malls feature unfamiliar stores. And the advertisements and signs are in Portuguese. But if you ignore these gross indications and just look at the people walking past, it is difficult to distinguish between Brazilians and Americans.

This is especially true of younger Brazilians. Brazilian men of my generation tend to be shorter than Americans. Brazilian women of all ages tend to be better looking, though in more or less familiar ways.

This is no doubt why advertisers use so many Brazilian supermodels to draw American customers to their products. Pick up a Victoria’s Secret orBoston Proper catalog or a Sports Illustrated Swimsuit Edition, and the range of beauties is likely to include a lot of Brazilians. In fact, two out of three of the world’s most highly paid models are Brazilians.

In the few hours I spent surveying the shopping crowd in Belo Horizonte, I saw four or five young women stunning enough to become supermodels if the right scout tapped them on the shoulder.

Young Brazilian women are prone to wear skin tight “low rise” jeans The tops of their pants end about five to six inches below their navels. This leaves a swath of two to three inches of bare skin on the lower abdomen showing below their tops.

Suffice it to say that the puritanical critique of revealing fashion for women, which finds its most adamant contemporary expression in radical Islam, has had little impact in Brazil. As a man, I would much rather see a young woman in a skimpy Brazilian bikini than see her draped in a burqa. Roughly speaking, two Brazilian bikinis could be fashioned from the fabric in a single handkerchief. This makes it the most efficient fashion in history for covering a female form since manufactured clothing replaced pelts and feathers.

High Hemlines: The Taylor Rule and Brazilian Growth

Lest you think that all this talk about Brazilian fashion is beside the point, I hasten to remind you of the famous observation, first made in the 1920s by Wharton economist George Taylor, known as the “hemline effect.” Taylor observed that in times of prosperity women’s hemlines rise and more bare skin shows. But when hemlines tumble and women’s clothes cover more body surface it’s time to hold on to your wallet.

After the stock market crash of 1929, women turned short skirts of the 1920s into dishrags. And hemlines tumbled to the ankles, where they remained throughout the Great Depression. That Brazilian women are adorned in some of the world’s most revealing fashions underscores my central observation of my trip to Brazil: that it is in a different phase of the leverage cycle than the major northern hemisphere economies.

Brazil is one of the fastest growing economies in the world, with growth rates two or three times higher than the US. This growth has happened despite the fact that Brazil has had the highest real interest rates in the world. In January, Brazil central bank reduced the primary interest rate – known as the Selic rate – from 13.75% to 12.75%. As recently as October 24, the CDI interbank deposit in Brazil was 16.8%.

Only a highly deleveraged economy could grow two-to-three times faster than the United States with interest two to three times higher than US levels. US economic growth would have ceased completely – and most banks, businesses and consumers would have been bankrupted – if interest rates had been at Brazilian levels over the past five years.

Because Brazil’s consumer economy is relatively non-leveraged, Brazil’s adjustment to the credit crisis – known here as the terremoto (Portuguese for “earthquake”) – does not involve a necessity to deleverage, much less cover the bodies of Brazil’s well-tanned women.

The crisis came as a shock in Brazil. But the shock was an external one: it arose in the major financial centers of New York, London, Frankfurt and Tokyo.

The biggest impact Brazil has felt so far has been due to the declining prices of primary products. Brazil is the largest exporter of natural resources: the largest iron producer, and the second largest exporter of farm products. The Brazilian capital goods industry took a major hit.

There were also some tense moments when a large number of Brazilian aerospace workers were furloughed after orders for aircraft were cancelled at the end of last year. (Brazil is the third largest producer of commercial passenger jets.)

Brazilian companies have already begun to recover. Witness the recent 75% rally in the Bovespa Index (comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange) and the 11% rise of the Brazilian currency, the real, versus the dollar so far in 2009.

Life Without Leverage: An Economic Success Story

Key to Brazil’s rapid recovery is that its banks are solvent and do not have to work out trillions of dollars worth of doubtful real estate loans.

Likewise, Brazil’s consumer economy is not hampered by consumers’ need to deleverage their balance sheets. This is mainly because Brazilians don’t have to pay off subprime mortgages against the background of falling real estate prices. Brazilian real estate prices are rising. And there are no subprime mortgages; most homes are sold for cash.

Brazilian auto companies aren’t going bankrupt, either. Auto sales hit an all-time high here in March. And it seemed like a lot of those new cars were blocking the entrances and hogging all the parking spaces at the top shopping center in Belo Horizonte.

In addition to getting a feel for retail demand in Brazil by visiting its busy malls I talked to leading industrialists, lawyers and real estate developers. I also met with a prominent former governor and an eccentric tycoon from Esprito Santo state, who looked like Elvis might have today had he lived. And I had very useful discussions with top economists and bankers. They all agreed that there are opportunities a plenty in Brazil to earn high returns.

Still, my shopping center impressions were useful, particularly in light of Nobel Prize-winning economist Vernon Smith’s observation that the Great Depression and the current crisis “had their origins in excessive consumer debt – especially mortgage debt – that was transmitted into the financial sector during a sharp downturn.”

In this sense, Brazil is dramatically different from the US. The average credit card debt of an American consumer is 41 times higher than that of his Brazilian counterpart. Mortgage debt in Brazil is also invisibly low. In 2005, a total of 594,000 residential properties were sold in Brazil. Only 38% were funded by mortgages; 62% were purchased with mostly cash transactions.

What is a “mostly cash” transaction? Well, many were all cash. But some involved combinations of payments: loans from builders and “let’s make a deal” promises to pay for the seller’s daughter’s wedding.

The most standard example of the “mostly cash” transaction for home purchases, however, is what the Brazilians call parcelar. It is not uncommon in Brazil for major purchases to be spread in three payments of 30, 60 and 90 days. These payments do not involve an interest charge. As seen through American eyes, paying through parcelar is a variation on paying cash that hardly qualifies as a “mortgage.”

The Deleveraged Economy: Bargains and Opportunity Galore

When I began to investigate where Brazil stands in the leverage cycle, I underestimated the dramatic difference in its situation – a difference that could have tremendous consequences for investing and for any American who wants to improve the speed and efficiency of his own effort to deleverage.

The leverage cycle in Brazil is in some ways akin to what it was in the US 80 years or more ago.

Brazil’s population today – just under 200 million – is about the same size as the US population was when I was in high school 45 years ago. That more or less coincides with the advent of credit cards, now abused by so many Americans; MasterCard and Visa started up in 1966. You’d have to go back at least to the early 1930s, before the advent of the 30-year mortgage, to find a time when American consumers were as deleveraged as Brazilians are today.

(Note that oil companies introduced charge cards that could be used in gasoline stations around America as early as 1924. And a number of department stores and other businesses began offering consumers store credit during the 1920s. There were also mortgages in the 1920s. But they were quite different from what we know today.)

When the mortgage market – initially funded by insurance companies – first arose in the US, home loan terms were limited to 50% of the property’s market value, with interest-only payments over three to five years. These culminated in a balloon payment for the entire principal amount.

The details are different. But the degree of leverage was similar to what is available in Brazil’s nascent mortgage market today.

The New Deal increased leverage in US mortgages after Roosevelt introduced the Federal Housing Administration (FHA) under the Federal Housing Act of 1934. This nascent government agency soon pioneered 80% loan-to-value mortgages on 15-year amortization, which allowed Americans to pay an incremental amount of the loan’s principal with each interest payment.

The initial intent behind the FHA mortgages was to enable lower income borrowers to obtain cash to buy a home. As the process of marginalizing carried on, however, it led to 30-year mortgages, cash-out loans at 110% of value… and the recent subprime mess.

The history of the US consumer has been one of more or less steadily increasing leverage, introduced in the first instance as a response to rising incomes in the 1920s and expanded by government action to increase demand in the Great Depression.

In fact, leverage has been so deeply ingrained in the US consumer economy since the Great Depression, that it is now difficult for an American to imagine how prosperity could develop in a cash and carry economy where people have no way to buy things they really can’t afford.

Brazil is an example of exactly that.

Until recently, Brazil was a country with a majority of poor people, a segment of wealthy people and a less significant layer of middle-class people wedged in between. But Brazil is now a country with a middle-class majority that comprises 52% of families, according to government statistics. Today, only about 12% of Brazilians are considered very poor. They are concentrated mostly in the northeast. The top 10% of income earners still account for 45% of total income (as compared to about 33% in the US).

Brazil: A Super Power in Waiting?

A few years ago, Goldman Sachs did a study that bracketed Brazil with China, India and Russia as the “BRIC” countries that collectively represent the world’s economic future. This has led on to an even more ambitious forecast, which many in Brazil’s government take seriously: that Brazil will become the world’s foremost economy by 2050.

As I reported in previous issues of Crisis Strategy Alert, Brazil leads the world in developing offshore oil technology. The country is poised to reap huge benefits from this technology as it begins to exploit two offshore fields, Tupi and Carioca, which together are thought to hold reserves of 40 billion barrels of oil.

These oil discoveries combined with gigantic potential for increased generation of electricity through hydroelectric power, which along with Brazil’s lead in bio-fuels point to a long-term future of energy independence for Brazil.

Another great advantage Brazil will enjoy going forward is it is likely to be exempt from the punitive carbon taxes that will be imposed on most advanced economies in the coming Copenhagen Conference. President Obama’s administration has already begun planning to implement these levies through a cap-and-trade system that will result in American companies sending money to Brazil to pay for carbon offsets.

This is part of reason that Americans’ cost of doing business at home is set to skyrocket as Obama adds trillions of dollars in new costs (with still more spending on health care and education programs).

Higher costs will only compound the difficulties as the US suffers a deeper downturn due to deleverage. It would not surprise me if Brazil enjoyed far greater growth in per capita GDP than the US over the next decade. Brazil has built a wealthy, modern economy – without degrading consumer balance sheets. Brazil’s banks are not over-leveraged; they have ultra-conservative, almost punitive, reserve requirements. Brazilian prosperity is not based upon people living beyond their means. That is all still to come.

Think about what it would mean for housing prices in the US if homebuyers actually had to pay cash for homes. Sales would come to a screeching halt. And home prices would be much lower than they are today. Leverage raises effective demand and thus increases prices and costs.

Why Leverage Matters

The lack of leverage in the Brazilian consumer economy has dramatic consequences for economic prospects. For one, the lack of leverage in Brazil requires that consumers maintain high savings in order to purchase homes. As the US economy struggles because consumers have had to curtail consumption in an attempt to revive their savings, the Brazilian savings rate is 25%. It doesn’t need reviving.

Another important consequence of non-leverage is that fewer resources are devoted to areas of investment in Brazil that are highly leveraged to consumers in the northern hemisphere and the British settlement colonies. (Australia and New Zealand have even more highly leveraged consumers than the US.)

Here is an example of why high leverage matters. As of the end of April 2009, there were approximately 1.7 million excess housing units in the US. This put the inelegantly named Homeowner Unit Vacancy Rate at about 2.7%. This alone tells you that the US economy is far from recovery.

Barry Bluestone, a professor of political economy at Northwestern University, says vacancy rates between 1.75% and 2% imply stable prices. Vacancy rates above 2% mean weakening prices. Vacancy rates above 2.5% lead to plummeting prices. And according to the real estate website Zillow.com, the number of American homeowners who are underwater on their mortgages climbed to 20.4 million in 1Q 2009, up from 16.3 million at the end of 2008.

On current numbers, residential property prices in the US are destined to continue falling. And this implies more mortgage defaults and challenges for the US banking system.

The high Homeowner Unit Vacancy Rate of 2.7% also implies that millions more homeowners will be underwater before the housing market hits bottom. And it helps explain why banks are now demolishing homes in the US rather than undertaking to sell them. This was the path taken by Guaranty Bank of Austin. It recently demolished 16 houses in a housing development in San Bernadino County, California, where home prices have fallen 60% from the peak in 2006.

Now contrast this with the situation in Brazil, where the vacancy rate hovers near zero. Brazil does not have an excess housing inventory. On the contrary, estimates by the Brazilian government and commercial banks put the current Brazilian housing deficit at 7.2 million units. This deficit is expected to grow to 12.45 million units within 15 years.

Not surprisingly, housing prices in Brazil are rising.

One of the more appealing opportunities for making significant money that I encountered in Brazil came to light in a discussion with a real estate broker who specializes in marketing mansions in high-end gated communities south of Rio. His customers are Brazilian celebrities – soccer stars, soap opera heroines, supermodels and business tycoons. He works with a leading construction firm to custom build five-to-seven bedroom homes that are sold for cash.

Sam Zell’s Advice: “Buy Brazil”

Famed property investor Sam Zell is pounding the table and telling everyone to “buy Brazil.” Fortunately, not many people have taken his advice, which means unexploited opportunities of a lifetime remain.

This is reflected in the low exchange value of the Brazilian real. As the IMF indicates in a recent study (which puts Brazil substantially higher in GDP per capita on a purchasing power parity basis than on nominal value) the exchange value of the real does not accurately reflect what you can buy with it in Brazil.

Part of the reason that Brazil’s prosperity is disguised is that its currency is undervalued. There is not yet sufficient international demand for the real for investment purposes to raise its exchange to reflect its domestic purchasing power.

One of the biggest bargains in Brazil is its low cost of living. Again, this probably reflects the lack of leverage available to the Brazilian consumer. Because Brazil is a “cash and carry” society, a lot of things in Brazil are cheap compared to the world’s developed economies. In other words, part of what makes Brazil rich is that it costs everyone else so much more to produce the goods and services that make up the modern economy.

Consider health care, a sector where costs in the US have ballooned. Brazil has an advanced medical care sector. But its costs are a bare chemical trace of those in the US.

Residents of Brazil have access to free public care. This is adequate and in some cases excellent, but it is plagued by long waiting lists. For less than $300 a month, those who can afford it can subscribe to a very high quality, private care system, somewhat like Blue Cross and Blue Shield, called UniMed.

Brazil ranks near the lowest in cost of living in the world. And the low cost of its health care is part of that appeal.

When you consider a city like Rio de Janeiro, well known for its beaches, its great weather, its nightlife, its parties, its yearly carnaval and the fabulous beauty of its landscapes, you might expect that it would be an expensive place to live. Wrong; a recent report by the Economist Intelligence Unit concluded that Rio, along with Sao Paulo, is among the cheapest big cities in the world.

Take a “Balance Sheet” Vacation

If you are trying to repair your balance sheet, and you need to save money, you might even consider moving to Brazil. You can get more for your money in Brazil than any place on earth. For example, if you took the money you now spend to live in the US and moved to Brazil, you could employ a housekeeper… a gardener… and a chauffeur… and still save 30% or more on your living costs.

As more people follow Sam Zell’s advice and “buy Brazil” the exchange value of the real will rise. Eventually, Brazil will introduce more leverage into its economy, and property prices will soar into the kind of bubble that inflated values in the US after the widespread introduction of mortgages.

When this happens, you will profit handsomely from any Brazilian property investments you make now. But you will no longer be able to buy a colonial house with a white-sand beach on the Atlantic Ocean for $100,000.

(Note that unlike in Florida, you won’t have to worry that the beach property that you could easily afford now in Brazil might be blown away by a hurricane. Weather records over the past 150 years show that only one storm that could be considered a hurricane has hit the coast of Brazil.)

The reason for the lack of hurricanes in Brazil is well understood by meteorologists but not by Brazilians; they have grown accustomed to weather in simple and benign forms. Brazil has no typhoons, no tornadoes, and no cyclones. Its one hurricane in historic memory was a freak occurrence – more significant for the surprise it engendered than damage it caused.

If you ask Brazilians about natural disasters, they will tell you that these are things that happen elsewhere. Even earthquakes are exceedingly rare. The only one strong enough to be noticed in Brazil in recent years was the terremoto in world financial markets following the bankruptcy of Lehman Brothers late last year.

Brazil is definitely a country that still lives on the sunny side of the leverage cycle.

The typical Brazilian abhors debt, because Brazilian interest rates have tended to be so high that incurring debt had punishing consequences… like dealing with a Mafia loan shark.

Still, Brazil is a sunny country. And Brazilians have dispositions to match the weather. They are warm and welcoming. If anyone I met during ten days of travel through the country was harboring concerns about Brazil’s economy, they never mentioned it.

That makes rather a refreshing change to the gloom that marks the American landscape as we feel our way forward through the dark side of the leverage cycle.

All the best,

James Davidson

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The Floyd Bostwick Odlum Memorial
Brainstorm of the Month:

Buying Brazil with Banco Itau

If you are new to Crisis Strategy Alert, welcome!

The Floyd Bostwick Odlum Memorial Brainstorm of the Month brings you crisis investing strategies inspired by Floyd Bostwick Odlum (1892-1976), possibly the only man in the US who made a great fortune out of the Great Depression.

Odlum’s key insight was that credit liquidations dramatically misprice assets. You can be a victim of this mispricing. Or you can watch carefully, move boldly at the right moment and seize the opportunities created by mispricing to build wealth rather than lose it.

In my research into investment strategies that worked in past depressions, nobody impressed me more than Floyd Bostwick Odlum. The Michigan-born attorney began with a grubstake of $39,000 in 1923. By 1929, he had turned this into $121,336,799.

When he was 23, Odlum came to Wall Street as an “idea man” for Sidney Zollicoffer Mitchell, a long-forgotten tycoon known as “Old Profanity” who controlled the Electric Bond & Share Company.

Odlum scoured the stock market for weak companies holding undervalued assets, which he then acquired and stripped of their assets.

He picked up enormously valuable assets by paying their hard-hit owners a few cents on “their lately pyramided dollars.”

Today, we have updated Odlum’s technique by not only scouring US stocks but by also looking around the world for undervalued financial assets.

We have uncovered a bonanza of opportunity in Brazil.

Profiting in Brazil

In our January issue, we honed in on the mispricing of US government paper relative to Brazilian government bonds – then priced to yield 12.9%.

One reason US Treasury yields are so invisibly low is the reflex reaction of most investors to the collapse of asset prices in Q4 2008 was to buy ‘safe’ Treasurys. But as we warned at the time, the US government has taken on many of the bad habits of printing money that stalled progress in Brazil during the 1980s and early 1990s.

You could easily argue, as Brazilian president Lula da Silva has, that Brazil’s economy is fundamentally in better shape than the US economy. Brazil boasts perhaps the world’s foremost endowment of natural resources. And as I argued earlier in this issue, it is still on the “sunny side of the leverage cycle.”

Brazil’s banking system is solvent. It has no problem with non-performing subprime loans.

That is one of the reasons that I recommend CSA members consider Banco Itau (NYSE:ITU), the largest bank in the southern hemisphere. ITU was also the most profitable bank in the world a few years ago.

Banking on Decoupling

Buying ITU is a bet that a crisis in the US and Europe is no longer an occasion to deleverage credit in the BRIC economies.

The 80% rally of the Bovespa from the bottom in Q4 2008 suggests that the local market is convinced that Brazil is prepared to find a way forward, even if the US and other major northern hemisphere economies remain stalled out in the aftermath of the credit crisis.

Two key advantages will help Brazil on its way: its large currency reserves and that its main trading partner is now China.

ITU has averaged a 26.8% return on equity over the past three years. And unlike the large US banks, it’s well-funded and doesn’t have a balance sheet riddled with toxic assets.

In addition to being the largest bank in Brazil, ITU has significant presence in Chile and Uruguay. If Brazil motors forward to become the next economic superpower, as I expect, ITU will continue to post stellar results. (It went ex-dividend on April 1, with a dividend yield of 1.44%.)

Your Road to 50% Return on Investment

Another bet on future growth in Brazil is CCR Rodovias-ON NM (Bovespa: Sao Paulo: CCRO3)

CCR Rodovias is the largest operator of toll roads in Brazil. Unlike the US, Brazil has made a policy commitment to privatize the operation of its highways. This means major roadways are being auctioned on a regular basis. The return on investment has been stellar – as high 50%.

As Brazil’s largest toll road operator, CCR Rodovias is a proxy for the growth of Brazil’s middle class. I expect the number of automobiles in Brazil to continue growing as incomes rise and the middle class becomes more vibrant.

There are still fewer than 200 passenger cars for every 1,000 people in Brazil; unlike in the US, where the car market is saturated, Brazil’s car market has a lot of “open road” in front of it.

Brazilians tend to prefer to live in gated communities as they reach higher levels of prosperity. This implies a surge in growth in commuter communities – and more traffic on the toll roads to fill the coffers of CCR Rodovia.

I am not shy about recommending additional exposure to the real. We thought in January that Brazil’s currency, the real, was undervalued relative to the dollar. I still think so. A relatively simple way to play this is through the WisdomTree Dreyfus Brazilian Real Fund (INDEXNYSE:BZF.TC).

We Wrote It… Did You Buy It?

A better bet is to buy Brazilian government bonds, if you can afford to trade in the large denominations normally required. The Brazilian bonds we recommended in January have not yet paid their first coupon. But if you acted when we recommended them, you have already realized a gain of almost 29% in just five months.

On the day we bought the Brazilian bonds, one dollar equaled 2.3275 real. As I write, the real trades at 2.0607 to the dollar.

This follows a joint announcement by Henrique Meirelles and Zhou Xaochun, governors of the central banks of Brazil and China. Meirelles and Zhou revealed plans to dump the dollar in international trade in favor of Brazilian real and Chinese yuan.

Interest rates have fallen in Brazil, as we foresaw. Our Brazilian bonds are now trading at 112.5. That means for every $1,000 you invested your capital is now worth $1,130. But this doesn’t include the 11.46% gain we’ve made in the Brazilian real. When that is considered, you have $1,259.53 for every $1,000 you invested in January.

You have accrued interest in Brazilian real at 12.9%. It won’t be paid until July; but your accrued interest of 53.9 real also includes a currency gain of 11.46%. This adds another $29.14 in value and brings your total gain on the Brazilian we government bonds we recommended to 28.8%. For every $1,000 you invested, you now have $1,288.67.

How to Make $20,000 a Year on Brazilian Bonds

You can see why there has been a big appetite for Brazilian bonds lately… and why aggressive investors have been borrowing in dollars and buying Brazilian government bonds yielding 10% to 11%.

The Jyske Bank of Copenhagen has a packaged program that lends dollars at interest rates between 4.175% and 4.875%. These funds are matched for purchase of Brazilian government 12.5% bonds maturing 2016 (priced to yield 10.9%) and Brazilian government 12.5% bonds maturing 2022 (yielding 11.0%).

This is a leveraged investment. You have to invest a minimum of $100,000, which is then matched with the proceeds of a loan for $100,000. But it gives you $200,000 deployed in the Brazilian bonds that pay roughly 10% interest – or about $20,000 a year. Of course, you have to net out the interest cost of borrowing $100,000. This could be as much as $4,875, which would still leave you a considerable margin in income.

You also have to account for currency fluctuations. If the real were to rebound even to its 2008 high of R$1.56 against the dollar, it would imply a 25% currency gain on the leveraged bond trade. At this rate, the annual interest payment on the Brazilian bonds would balloon to $25,000. And you could be covered on the dollar interest with more than $20,000 net income to spare.

Before you undertake a leveraged trade in Brazilian government bonds you have to consider the risk of the currency moving against you. There is such a risk, of course. But just about the only trigger I can imagine precipitating an upward surge in the dollar would be another deflationary shock along the lines of the collapse of Lehman Brothers. Such an event, if it occurred, might be another buying opportunity for high-yield Brazilian bonds.

Brazil: The Most Politically Stable BRIC

I see little immediate prospect of Brazil lurching to the left in any fundamental way: both the leading political parties seem committed to a market economy.

Dilma Rousseff, Lula’s hand-picked nominee to succeed him as the candidate of the Worker’s Party (and the first woman to seek the presidency of Brazil) is, like Lula, a former firebrand who has mellowed over the years. She is the chairperson of Petrobras, another of our successful plays on Brazil. We’re up 20% in our Petrobras holding in less than two months.

If only all investments went as well as our trades on Brazil have gone this year.

In recognition of the fact that consumers in the US and other mature economies remain heavily leveraged, I am repeating my recent recommendation of Money4 Gold. Money4Gold Holdings Inc (OTC:MFGD). Buy up to $0.60 a share.

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Vital Signs of the Crisis

By Charles Delvalle

This is a chart of the Case-Shiller Home Price Index. As you can see, the value of homes has been dropping steadily for the past three and a half years.

Will home prices finally steady out? That’s unlikely. Next up is a chart of RealtyTrac’s foreclosure filings…

Not only are foreclosures climbing, but they are still breaking records.

As consumers lose their home, they lose purchasing power. Here’s a chart of new car sales in the U.S.

As expected, car sales have plummeted. Not even has sub $2.00 gas been able to spur buyers into the market. Not something too strange, considering the credit constraints in that market.

A depleted consumer, though, is going to hurt far more than just the auto industry. Here’s what earnings estimates look like across the S&P 500.

Since March 20, earnings expectations have dropped 65%. That’s the worst since the great depression.

How about a bit of good news? After a brief respite of abnormal strength during the worst of the credit crisis, the dollar is getting hammered again

Why is the dollars death good news? Because during this recent crisis, the buck and the stock market have had an inverse relationship.

The Dow Jones has seen strength since the first week of March. This is precisely the same time that the buck began to weaken.

IF all of these charts begin to make you question where in the hell the “green shoots” economist have been talking about, you’re not alone.

Only the stock market has moved higher recently. To date, many of the economic indicators out there are still showing an economy that is shrinking, just less bad.

Instead of heavily vesting ourselves in a fundamentally broken economy such as the U.S., an economy that is on the sunny side of the leverage cycle (like Brazil) gives you a much easier way to make money.

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