The Fracturing Bubble Down South: Brazil Is Another Victim Of Global Money Printing

Did Bloomberg recently acquire The Onion and fail to announce it? Well, you have to read its lead paragraph about Brazil's latest outlook twice to be sure:

Analysts reduced to 0.55 percent  their GDP estimate for 2015 from 0.69 percent the previous week, according to the Dec. 19 central bank survey of about 100 analysts published today.

Apparently that's a tradable data bite for some algo, somewhere. But its also a cogent demonstration that central bank driven financialization has generated mind-blowing pockets of wasteful stupidity everywhere. Could there really be 100 economists updating there GDP forecast every week to the second decimal point for Brazil alone?

In the real world, Brazil is a financially unstable, debt-bloated, politically corrupt, speculation-riven satellite of the China house of cards. Accordingly, the 14 bps of GDP forecast change highlighted above is about as pure an expression of content-free noise as can be found in the financial media. It cannot possibly be of any use except to robo-traders with holding periods of a few seconds---or even hours or days for that matter.

If someone were to actually "invest" in Brazilian securities, by contrast, it might be better to know that nearly every single macro indicator is heading  south at an accelerating pace; that over the last 10 years the Brazilian economy has been bloated and distorted by the double whammy of unsustainable demand for raw materials from China and rampant internal malinvestment and speculative bubbles funded by its socialist government and the latter's central bank hand-maiden; and that the Brazilian household sector went on a borrowing spree that made the US mortgage bubble look tame.

So the relevant investor question is not 14 basis points of economists' forecast noise, but whether the Brazilian economy is fixing to make another one of its historically patented nose-dives into traumatic bubble liquidation.

Historical Data Chart

By all appearances, a dozy of a free-fall is already in the cue. Real GDP has been floundering for two years and inflation has been running red hot. So the central bank has had to once again push the policy rate to nose-bleed levels.

Historical Data Chart

Historical Data Chart

Historical Data Chart

Yet the above is only representative of the surface troubles. During the last 10-years, Brazil has experienced what amount to a double-bubble. That is, its export accounts rose 5X between 2004 and the 2012 peak of the China infrastructure boom. At the same time, domestic consumer debt rose by 8X.

Historical Data Chart

Historical Data Chart

Here's the thing. In a healthy free market economy, big variables like exports and consumer debt can possibly grow by 0.5X (i.e. 50%) during the course of a decade----when the stars are well aligned. But not by 4-8X. Not even close. The latter happens only under the spell of unsustainable bubble economics; it embodies the footprint of rampant central bank money printing.

It goes without saying that Brazil's soaring exports of soybeans, iron ore, and other industrial materials to China would not have happened absent the massive credit bubble there----which caused total credit market debt outstanding to soar from $1 trillion to $25 trillion in less than 14 years. Yet that's only half the story.

As has been the fashion among all EM policy-makers, during the peak of the post-2008 global industrial boom, Brazil's central bank saw fit to engage in massive financial repression in order to cap its exchange rate and keep the export bonanza flowing. Accordingly, its balance sheet exploded by 4X in the course of the last eight years.

Historical Data Chart

Needless to say, in keeping its exchange rate down, the Brazilian central bank fueled a humungous growth in internal private debt. The latter his erupted by 5X since 2006-----much of its channeled into crony capitalist speculation in petroleum and unionized heavy industry by Brazil's infamously corrupt and powerful national development bank (BNDES).

Historical Data Chart

Yes, the chickens are now coming home to roost. Global industrial cooling has flattened the demand for exports, leaving Brazil's vastly over-built oil, mining, steel and other industrial sectors reeling from evaporating cash flow and unrepayable debt. Already Brazil's leading bubble era speculator, Eike Batista, is surrounded by his collapsing $100 billion industrial and energy empire, and a bevy of state prosecutors trolling for a scape goat.

In short, Brazil's 4th and latest "economic miracle" since 1960 was levered to the mother of all global bubbles led by China. Now $50 oil/barrel oil (down 50%) and $65/ton iron ore (down 70%) are about to bring its economic roof down.

Good thing we have Bloomberg keeping up on 14bps of imaginary GDP.

By Mario Sergio Lima at Bloomberg News

Brazil economists cut their gross domestic product forecast and raised their inflation estimate above the official target range as deteriorating confidence will present a challenge for the government’s new economic team.

Analysts reduced to 0.55 percent their GDP estimate for 2015 from 0.69 percent the previous week, according to the Dec. 19 central bank survey of about 100 analysts published today. Analysts also cut to 0.13 percent the estimate for growth this year, from 0.16 percent last week.

Latin America’s largest economy is expected to record the slowest growth in five years as inflation hovers near the ceiling of the target range and the budget deficit remains at the highest in a decade. Finance Minister-designate Joaquim Levy has vowed to impose more rigorous fiscal discipline in a bid to restore confidence and reignite activity.

Brazil’s economy grew 0.1 percent in the third quarter over the three previous months, after contracting 0.6 percent in the second quarter, the national statistics agency said Nov. 28. The result barely pulled Brazil from the recession it entered in the first half of the year.

Brazil’s inflation in the month through mid-December accelerated faster than forecast, speeding up to 0.79 percent from 0.38 percent a month earlier. Annual inflation accelerated to 6.46 percent in mid-December from 6.42 percent the month before. The central bank targets annual inflation of 4.5 percent, plus or minus two percentage points.

Economists see inflation at 6.54 percent by the end of 2015, according to the survey. Central bank President Alexandre Tombini told reporters last week that prices will accelerate in the first quarter of 2015 and inflation will converge to the 4.5 percent target by December 2016.

The central bank on Dec. 3 raised the benchmark interest rate a half-point to 11.75 percent in a bid to slow inflation. Policy makers said future rate increases will probably be conducted with “parsimony.”


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