Suddenly, There's Unrest Everywhere
First Turkey, now Brazil – the masses are getting restless. In Brazil it is understandable that protests are flaring up. The country is slithering down the other side of a credit bubble mountain, something that has been reinforced by declining commodity prices and accompanied by soaring consumer prices to boot.
The Bovespa has been declining for some time now and the fall in the Brazilian real has been even worse. Brazil and a number of other commodity producing countries are-- so to speak-- twin bubble warrants. On the one hand, credit bubbles in them were egged on by the ultra-loose monetary policy in the West, which sent waves of foreign capital in search for yield flooding into them. On the other hand, China's credit bubble and the associated investment boom triggered a seemingly unstoppable upward spiral in commodity prices. All of these events have been reinforcing each other, but the root cause is the same wherever one looks: the scourge of central banking.
Now public anger is suddenly boiling over in Brazil and violent protests are erupting, a phenomenon typically associated with a souring social mood.
The Bovespa is back to where it was four years ago – only, the direction it is going in is 'South' this time – click to enlarge.
According to Reuters, the Molotov cocktail wielding mob (which ironically was praised for being 'peaceful' by the president) demanded a "dizzying array of improvements":
"When more than 200,000 protesters took to the streets across Brazil on Monday night, they demanded a dizzying array of improvements – from halting the fast rise of prices to cleaning up government corruption.
If one message stood out, it was that Brazilians are no longer willing to accept the rosy outlook that politicians in Latin America's biggest country have been painting for years.
Until recently, Brazil was one of the world's most envied economies. An export boom, growing domestic demand and ambitious social welfare programs for much of the past decade led to average annual economic growth exceeding 4 percent and lifted more than 30 million Brazilians from poverty. But vast economic differences still divide Brazil.
A sluggish economy, rising inflation and the poor quality of public services are prompting optimism to wane. Brazil may have made big strides, but daily life for most people remains a gritty, frustrating ordeal compared to what they imagine when considering the country's elusive potential.
"The fantasy that the country is paradise, a marvel, is over," wrote Eliane Cantanhede, a columnist for the Folha de S. Paulo newspaper, on Tuesday. The implications of the message are far from clear. No one political party is the target of the protests, which were initially sparked by an increase in bus fares but became a groundswell of other complaints. No single politician is the object of the wrath aimed at local, state and federal figures alike. Still, it is remarkable that the protests broke out at all.
Unemployment remains near record lows. Brazil has not seen public turmoil on this scale since far worse economic problems and a corruption scandal combined to topple a president in the early 1990s. The generation driving the protests, mostly young first-time activists rallying through social media, has long been derided for its political apathy.
With more protests planned, officials are trying to get ahead of the message, which demonstrators know is resonating all the more as the country puts on a series of high-profile events in the coming years. In addition to an ongoing international soccer tournament and a forthcoming visit by Pope Francis, Brazil will host the 2014 World Cup and the 2016 Summer Olympics.
Though the country normally shines during big celebrations, particularly when it comes to soccer, the more than $3 billion cost of World Cup stadiums has given demonstrators a price tag to latch onto as they criticize a lack of investment in roads, health clinics and security, a growing concern because of a surge in violent crimes in many cities. President Dilma Rousseff, who just last week denounced growing criticism of Brazil's economic outlook as "terrorism," on Tuesday praised the protesters for being mostly nonviolent and vowed to heed their concerns.
"My government hears the voices clamoring for change," she said in a speech in Brasilia, where demonstrators danced on the roof of the national Congress building on Monday. The success of the past decade, she added, "created citizens who want more and deserve more," conceding the need for better hospitals, schools, transportation and the many other demands made by the demonstrators.
Delivering more will be hard, though, at a time of economic uncertainty and in a noisy, unwieldy democracy where Rousseff's own congressional allies often torpedo her simplest initiatives."
Looking at the Bovespa, we're not so surprised that the 'protests broke out at all'. Unfortunately it sounds like many of the demonstrators are demanding more rather than less government interference. They are bound to get it.
Currency War Goes Into Reverse
It wasn't too long ago that Brazil's minister of finance was complaining about the 'currency war' and that Bernanke's money printing was driving up the Brazilian real to the point where the country's export industries were allegedly getting into trouble. Brazil even introduced a tax on foreign funds entering the country in order to slow the influx down.
Times have changed. These days the central bank of Brazil is attempting to prop the real up with interventions, but has so far been unable to stem the bleeding.
The Brazilian real vs. the dollar, monthly candlesticks. Note, when the ratio is rising, it indicates a decline in the real's value – click to enlarge.
Here is a line chart showing specifically the move from the 1.50 level that has taken place over the past two years:
The real's bear market over the past two years – click to enlarge.
Brazil's central bank is in quite a quandary now: it can no longer lower interest rates, as rising prices threaten to veer out of control. In fact, it has recently begun to hike its administered rates, which nevertheless remain negative in real terms (maybe they should rename the 'real' the 'unreal'). At the same time, the economy is weakening, and over-indebted consumers – Brazil has experienced a major consumer credit bubble in recent years – are feeling the pinch. What's a central planner to do?
In short, Brazil is now experiencing what used to be called 'stagflation' in the 1970s – a slumping economy beset by rising prices. This is the kind of situation that is 'not possible' according to Keynesians like Paul Krugman. However, it appears that it is possible after all.