Waiting For Brazil

by: Alhambra Investment Partners

By Jeffrey P. Snider

There is more than one way to look at the emerging markets and frame the debate about what should or might be done. I think this quote from the Financial Times, however, falls outside the boundaries of reason:

"So far we are still not seeing the impact of the currency devaluation we had last year," said David Beker, economist with Bank of America Merrill Lynch. "That's what we are waiting to see."

It is possible that Mr. Beker misspoke or was misquoted, but if we take the Financial Times as accurate then there is little to be said of that statement that could be seen positively. I'm pretty sure that Brazilians saw enough of the currency's devaluation to feel a direct impact, regardless if that impact was at all felt at Merrill Lynch. After all, it only took a relatively small increase in bus fare for hundreds of thousands to take to the streets, showing the degree to which simmering resentment over currency devaluation has impacted the Brazilians themselves.

Whether or not that played a role in pushing the Banco do Brasil to implement "emergency" measures is not clear, but it is obvious that the Brazilian central bank too saw an impact of the currency devaluation. That impact was frightening, and it further impacted the Brazilian economy by pushing inflation to the top end (and above) of the central bank "band."

What Mr. Beker likely was referring was the "positive" impacts of currency devaluation - namely trade parity. It is expected in the convention of economics that a weaker currency is "good" for trade balances. Thus, the heavy devaluation of the real in 2013 should have, so this goes, made Brazilian exports more "competitive." Like Japan, the tradeoff (voluntary or not) is internal inflation and instability for an increase in exports. Economists assume that it will always work in their favor, therefore they always support such programs.

The context of Mr. Beker's quote was the largest monthly trade deficit in Brazil's history in January. So the "impact" he was looking for was that export "boost." Not being able to find it left him stating there was no impact at all, when a more careful and accurate statement would have been to at least qualify that there was no "positive" impact. That would at least implicitly refer to the turmoil inside Brazil right now, including record high interest rates and a stock market that (until today) was down about 20% just from October. Those are very real impacts of the currency.

That has left economists, yet again, searching for an explanation for the missing panacea and utopia. First, FT notes that the Brazilian central bank wanted this devaluation, just not to let it get out of control. Everyone wants a fairy tale ending; the real world rarely cooperates. Then there are the excuses:

But economists say the positive effects of the depreciation of Brazil's currency have yet to come through in the trade balance, possibly due to a lag effect and because the real has further to weaken.

There is another explanation that doesn't need to resort to convolution. Perhaps it is more likely that the devaluation they wanted was not really of their own accord (taper dollar tightening) or via organic market mechanisms (which would suggest a valuation explanation), and that the reason exports haven't picked up is that global trade is decreasing at the same time. It doesn't matter that Brazilian resources are now cheaper on global markets, relatively, there is little or no demand for them at even reduced prices.

That would suggest, however, that Brazil's fate is not in its own hands. It would also suggest that, given dynamics here, there may be a lot of pain ahead. Such is a centrally planned financial world.

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