Brazil Depends on China to Avoid Economic Shake Down

Reuters
August 14, 2011

As Brazil watches much of the so-called rich world struggle with debt crises, it can take some solace in the likelihood that its growing ties with China should shield it from the worst aftershocks.

The most vulnerable front for Brazil could be its currency, which could firm further — creating even bigger headaches for exporters — if U.S. interest rates stay ultra low due to continued slow economic growth or a possible downgrade by ratings agencies.

Yet Brazil’s China connection should keep the worst at bay, insulating the country on two levels.

On a microeconomic level, Brazilian companies are less vulnerable to a downturn among their U.S. counterparts. On the macro-economic side, it means Brazil has another source of investment and trade flows.

“The effects on emerging markets will depend a lot on China’s reaction to the international climate,” said Zeina Latif, an economist with RBS in Sao Paulo. “If China turns out OK and they have a soft landing, that’s great for Brazil.”

The United States averted default on Tuesday mere hours before a deadline.

But a deficit-cutting package and the chance of a sovereign downgrade left investors nervous, with global markets sinking on Wednesday in response. European officials have yet to put worries about a sovereign debt crisis there to bed, with Italy the latest country to come under investor scrutiny.

Brazil has plenty of its own problems, too, from above-target inflation to a tight labor market that has pushed wages, and thus consumer prices, higher. Those inflation fears, in fact, have been a major cause behind the underperformance of Brazilian stocks so far this year.

Yet the country’s economy is still expected to grow about 4 percent as millions of people keep moving from poverty into the middle class. Employers are hiring in droves, many Brazilians are taking their first-ever plane rides and malls are packed.

China — which leapfrogged the United States to become Brazil’s biggest trade partner in 2009 — should grow even more, around 9.6 percent this year. Even better, analysts say that country is showing signs of balancing inflation and expansion, avoiding a so-called hard landing.

“China might be a more important driver for corporate ratings in general for the southern part of Latin America,” including Brazil, Peru, Chile and Argentina, said Filippe Goossens of Moody’s Investors Service.

Take Vale (VALE5.SA), a major weight in the benchmark Bovespa index .BVSP. The company is the world’s biggest producer of iron ore, and China its single biggest customer as it builds and urbanizes across a vast landscape.

“One of the areas within the Brazilian equity market that we like the most is materials, with a focus on iron ore, and that’s because we do not foresee a hard landing in China,” said Jason Press, a Latin America equity strategist at Citigroup in New York. However. he expressed caution on volatility ahead.

MACRO RIPPLES

Vale is hardly alone. Two years ago China agreed to lend state-controlled oil giant Petrobras (PETR4.SA), another Bovespa heavyweight, $10 billion in return for guaranteed oil supply over the next decade. That money will help Petrobras tap into massive offshore oil reserves that are expected to catapult Brazil up the list of oil exporters.

China could also become the top market for Brazilian sugar exports, thanks to an increasingly urban population opting for fast food and soft drinks.

The Asian nation, in fact, bought $20 billion of Brazilian exports in the first half of 2011 — almost 50 percent more than in same period of 2010.

China is doing more than just buying Brazilian products; it is also buying into Brazilian growth. Carmaker JAC Motors announced this week plans for a $600 million factory in Brazil to open in 2014, the latest of billions of dollars in pledged investments.

In fact, Citigroup’s Press noted, equity markets could see more effects from macroeconomic channels.

Those ripples could hit Brazil’s currency, the real, said Mauricio Rosal, chief Brazil economist for Raymond James.

With the budget savings promised in the U.S. debt deal, Washington would not be able to ramp up spending to try to stimulate the economy. Instead, that job could be left to monetary policy — in other words, super low interest rates to try to boost growth among consumers and industry.

But near-zero U.S. interest rates give investors a source of cheaply borrowed money with which to chase Brazil’s juicy yields, and interest rates here are already at 12.50 percent.

That so-called carry trade has already helped take the real to 12-year highs against the U.S. dollar, with the government announcing last week new measures to try to brake the currency’s gains.

“This discussion around U.S. fiscal policy reinforces an outlook for global liquidity,” Rosal said. Mitigating inflows into Brazil “will be a great challenge that will continue for awhile yet.”

But Moody’s Goossens cautioned that there is still much uncertainty around long-term results of the U.S. debt debate, including the effects, direct and indirect, on other economies around the world. As a result, any attempts to forecast what could happen in other countries are fraught with uncertainty.

“These are truly uncharted waters,” he said.

Debt Deal: ”It’s like Curing a Drunk with Vodka”

By David Lawder
Reuters
August 1, 2011

The tentative deal to avoid a crushing debt default is at best a mild relief for the U.S. economy that nearly stalled in the first half of the year and has yet to show signs of any realistic pickup.

The plan for $2.4 trillion in spending cuts over a decade, if backed by lawmakers, would help lift some of the uncertainty that has weighed on investors, businesses and consumers unsettled by talk about a possible new and deep U.S. financial meltdown.

Still, it does not decisively remove the threat that the nation’s AAA credit rating could be downgraded, an action that would raise borrowing costs across the board, and the prospect of further cuts ahead will cut short any celebrating.

“This will have minimal impact on the economy. The cuts are not there for the first couple of years, which really makes you wonder if they’re really going to happen at all,” said Peter Morici, an economics professor at the University of Maryland.

The prospect of spending cuts is the last thing the U.S. economy needs right now, many commentators say.

Economists were stunned on Friday when data showed the U.S. economy grew just 0.4 percent in the first three months of this year — perilously close to contraction — and picked up unimpressively to 1.3 percent in the second quarter.

Against the backdrop of the weak economic recovery, the divided political parties in Congress appear to have agreed on one thing early on in their dispute over how to raise the U.S. debt ceiling: that spending cuts to narrow the deficit should be phased in slowly. They will be phased in from 2013.

President Barack Obama told reporters on Sunday that the initial discretionary cuts, expected to be about $917 billion, “wouldn’t happen so abruptly that they’d be a drag on a fragile economy.” He added that “job-creating” investments in education and research would be preserved.

But the bulk of the austerity has yet to be defined.

About $1.5 trillion of the planned savings will be decided by a bipartisan congressional commission, leaving unanswered the question as to whether the United States has the political will to tame the country’s growing debt pile once and for all.

Troy Davig, U.S. economist at Barclays Capital, estimated that the deal would only cut $25-30 billion from government spending in the first year, which could shave about a tenth of a percentage point off economic growth.

“It’s not a major drag on growth but when the economy is only growing a point and a half, a lot of economists feel that this is not the right time to be finding fiscal restraint. We will be shifting from massive stimulus to massive restraint.”

Steeper and faster spending cuts could have dealt a knockout blow to an economy reeling from high fuel prices, bad weather, Japan’s earthquake and a depressed housing market, plus a labor market that shows few signs of recovery.

LITTLE SCOPE FOR STIMULUS

Proposals discussed just a week ago included possible new fiscal stimulus measures, such as extending payroll tax cuts for employees and offering them to employers as well.

There appeared to be no room for them in Sunday’s preliminary deal which is expected to be voted on in the Senate on Monday and sent to the House of Representatives for approval. The bipartisan panel, which must draft more cuts by November, could revisit the issue.

There could be some relief among U.S. employers and consumers that taxes won’t rise under the new, hard-fought deal and that the worst-case scenario has been avoided.

The talks have been punctuated by warnings from the Obama administration that financial chaos would ensue if the $14.3 trillion federal borrowing limit is not raised by Tuesday.

That angst has added to a pile of worries slowing consumer spending decisions such as car purchases, according to Detroit executives. Existing home sales in June fell sharply due a big jump in canceled sales contracts.

Obama, too, said he has been concerned about the debt limit battle’s impact on consumer and business confidence. He said he hoped Sunday’s deal “will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”

Any relief, however, is likely to be short-lived. U.S. jobs data on Friday will probably prove another reminder of the weak U.S. economy. Unemployment is expected to remain at 9.2 percent, according to a Reuters poll.

The budget deal “does nothing to restore household and corporate confidence,” said Mohammed El-Erian, chief executive of bond fund investment giant PIMCO.

“So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise,” El-Erian told ABC’s This Week with Christiane Amanpour.

Just as Washington’s political leaders have run out of money to throw at the U.S. economy, the Federal Reserve looks lacking in ammunition too.

The U.S. central bank waged an massive experiment in monetary policy over the last few years to prevent the 2007-2009 recession from spiraling into a depression, slashing interest rates to zero and pumping $2.3 trillion into the ailing economy by buying debt,

The Federal Reserve is not expected to rush in to make up for the loss of any stimulus to boost growth.

Atlanta Federal Reserve President Dennis Lockhart said on Friday there would be a “very high bar” for more stimulus.

At least the deal taking shape in Washington would push the scary prospect of a U.S. debt default out until after the 2012 presidential election. But investors worldwide will still worry about the ability of the United States to avoid future downgrades of its debt, a move that would probably push up borrowing costs and act as yet another drag on the economy.

“Talk about kicking the can down the road, this is probably the biggest can that’s ever been kicked — appointing another commission to do the heavy lifting another day,” Yale University economist Stephen Roach told Reuters Insider.

The Debt Deal Meaning? It’s Meaningless

by Zeke Miller
Business Insider
August 1, 2011

The “historic, bipartisan compromise” reached to raise the debt limit does not end the struggle to reign in the federal deficit — in fact, it pushes the most difficult decisions off into the future.

More surprising, the debt deal actually cuts almost nothing now–it just promises future cuts that may or may not materialize.

There are very few specific cuts in the deal — and the $1 trillion in immediate cuts are almost entirely constituted of caps on future spending. And those caps are not required to be honored by future congresses.

The “real” spending cuts to current programs will come out of a bipartisan committee of Representatives and Senators, which is charged with finding an additional $1.5 trillion in savings from the federal deficit.

But White House and Republican leaders appear split on exactly what the so-called “Super Committee” can do.

In a presentation to his caucus, Speaker of the House John Boehner said it would “be effectively…impossible for [the] Joint Committee to increase taxes,” even though it could consider reforming the tax code.

White House officials strongly pushed back on that remark, saying revenue-increasing reform is possible — even though it almost certainly would not be able to get through Congress.

The committee is modeled on “BRAC” or the Base Realignment and Closure Commission, whose recommendations are presented to Congress for a straight up-or-down vote with no amendments allowed. Instead of non-partisan commissioners, each congressional leader will appoint three members of Congress to the committee.

If the Super-Committee can’t reach an agreement, or their recommendations cannot pass Congress, deep “real” spending cuts, which are painful to both sides, would take effect. For Democrats, entitlement cuts are at risk, while Republicans would see cuts to defense spending.

Additionally, President Barack Obama has the ability to veto an extension of the Bush tax cuts if he deems the committee’s solution insufficiently “balanced.”

So, again, other than cuts to federally subsidized student loans to graduate and professional school students, the debt deal actually cuts NOTHING now, and only promises future reductions that may never materialize.

In short, for the past month, Congress has been arguing about little more than an agreement to reach an agreement at some point in the future. Your tax dollars at work.

Ron Paul Embarrasses Ben Bernanke as he says Gold is not Money

Forbes
July 13, 2011

Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday.  The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold.  “Gold isn’t money,” Bernanke said. (See video below).

While most of Bernanke’s reports to Congress serve politicians to pursue their own agendas by gearing the Chairman towards their issues, with Republican Rep. Bacchus talking of the unsustainability of Medicaid and Rep. Frank (D, Mass.) asking about the need to raise the debt limit without cutting spending, it was a stand-off between Bernanke and Ron Paul that took all the attention. (Read Apocalyptic Bernanke: Raise The Debt Ceiling Or Else).

Rep. Ron Paul, Republican for Texas, asked Bernanke why a capital injection of more than $5 trillion “hasn’t done much” to help the consumer, who makes up about two-thirds of GDP in the U.S., and prop up the economy, while it helped boost corporate profits.  “You could’ve given $17,000 to each citizen,” Ron Paul claimed.

Bernanke, clearly on the defensive, told Rep. Ron Paul that his institution hadn’t spent a single dollar, rather, the Fed has been a “profit center” according to the Chairman, returning profits to the federal government.  As Bernanke began to sermon Rep. Paul on the history of the Fed (“we are here to provide liquidity [in abnormal situations],” the Chairman said), he was interrupted.

“When you wake up in the morning, do you think about the price of gold,” Rep. Paul asked.  After pausing for a second, Bernanke responded, clearly uncomfortable. that he paid much attention to the price of gold, only to be interrupted once again.

“Gold’s at about $1,580 [an ounce] this morning, what do you think of the price of gold?” asked Rep. Paul.  A stern-faced Bernanke responded people bought it for protection and was once again cut-off, with Ron Paul once again on the offensive.

“Is gold money?” he asked.  Clearly bothered, Bernanke told the representative “no, gold is not money, it’s an asset.  Treasuries are an asset, people hold them, but I don’t think of them as money,” said Bernanke.

Rep. Ron Paul again jumped in, noting the long history of gold being used as money, and then asked Bernanke why people didn’t hold diamonds, clearly hinting at his fiat money criticism of the U.S. monetary system.  The Fed Chairman told Rep. Paul it was nothing more than tradition, and, as he was attempting to develop his argument, Rep. Ron Paul quickly asked the acting authority of the House of Representative’s Committee on Financial Services, Rep. Bacchus, to excuse him for exceeding his time, as he returned the floor to the Committee. (Read Bernanke To Rep. Paul Ryan: QE2 Created 600,000 Jobs).

The interesting exchange served as one of the few times Bernanke has been publicly pushed off his comfort zone by an elected official.  Rep. Ron Paul brought up the issues that he’s famous for, namely, a sort of allegiance between the Fed and the nation’s most powerful institutions, the illusion of fiat money, and the gold standard.  Bernanke, angered and bothered, had no option but to respond. (Read Bernanke’s Contradiction: Minutes Reveal QE3 Talk And Exit Strategy).

Eurozone Risks Fallout as Bankers try same old Ineffective Medicine

Breitbart
May 31, 2011

The debt crisis in Greece, Ireland and Portugal could have “significant systemic effects” in the eurozone, Italy’s central bank chief Mario Draghi, who is set to head up the European Central Bank,said on Tuesday.

“In the eurozone, the sovereign debt crisis in three countries, which together represent six percent of the area’s GDP, has the potential to exert significant systemic effects,” Draghi said at a central bank conference.

“European economic and monetary union is facing its most difficult test since it was created,” added Draghi, referring to Greece, Ireland and Portugal which have agreed bailout packages worth tens of billions of euros (dollars).

“European surveillance over national budget policies, which was weakened in the middle of the last decade on the initiative of the three biggest countries, showed itself wanting just when it was most essential,” he said.

Had the European stability pact rules been respected to the letter, the ratio of public debt to gross domestic product on the eve of the crisis would have been 10 percentage points less in the eurozone, he said.

“There are no shortcuts,” warned Draghi, calling on governments to rein in public finances.

“Financial support from other governments in the eurozone is needed for countries to proceed with corrections while being sheltered from the volatility on the markets. It is not a fiscal transfer between countries,” he said.

Draghi said it was up to the ECB to “ensure price stability in the medium term”. “Neither sovereign risks nor the pathological dependence of some banks on ECB financing can deflect from this task,” he added.

A former economics professor and Goldman Sachs investment banker who has been overseeing a series of global financial reforms, Draghi has been anointed as the next European Central Bank chief to take over from Jean-Claude Trichet.

He is due to be formally appointed during a European Union summit in June.

Pointing to a slow recovery in Italy, Draghi said the government should focus on boosting growth by dealing with the problem of low productivity, a weak labour market and upgrade infrastructure and the education system.

The central bank governor said the government’s target of reaching a balanced budget by 2014 was “appropriate” but warned against “uniform” budget cuts that could undermine an already weak recovery.