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Editors note In yesterdays essay Agora founder

first_imgEditor’s note: In yesterday’s essay, Agora founder Bill Bonner shed light on the big opportunity emerging in Brazil. Despite its struggles over the years, the country has a lot of things going in its favor right now. In today’s essay (updated from when it was originally published in The Bill Bonner Letter), Bill explains why… By Bill Bonner, editor, The Bill Bonner Letter Falling prices of grains and other resources have hit the Brazilian economy hard. Mining, energy, and agriculture are three of the country’s most important industries. Even the weather has turned against Brazil. Although São Paulo’s epic drought is now over, industrialists and activists warn that fresh shortages may be just a matter of time. And since much of the country’s power comes from hydroelectric plants, a water shortage could prompt electricity rationing. Crime is another hazard, of course. And so is inflation. “You can’t imagine how awful it was,” began an eyewitness to Brazil’s hyperinflation of the 1980s. “You’d get paid and you had to go out immediately to spend your money. Prices were going crazy. You never knew what to expect. You couldn’t plan. There was no point in making a budget. “You wanted to make an investment or start a business? Forget it. The economy was falling apart.” All the plans to stop inflation failed. Predictably, they began with a price freeze. “Disastrous,” our witness reports. “Within hours the merchandise had disappeared from the shop shelves.” The price index rose approximately 1.6 trillion times from 1980 to 1997. For the few investors with money in the stock market in the late ’80s, it must have been a helluva ride. The benchmark Bovespa Index rose from nothing to more than 53,000 today… with about a dozen zeros lopped off along the way. An investor would have gotten about the same thing in Brazilian stocks as in U.S. stocks – a gain of about 15 times his money. But there is one big difference. Brazilian stocks today are still cheap. “Brazil is still an emerging market,” my host, Felipe, explained. “So it is more sensitive than the U.S. People become fearful and they take their money to the U.S. When they are greedy, they come here.” On the evidence, global investors are not especially greedy. You can buy the average Brazilian stock for just 8.2 times earnings, as tracked by Shiller’s CAPE. That’s a third of the U.S. level. Besides price, Brazil has demographics in its favor… Relatively few people on the Rua Cachoeira can even remember the hyperinflation of the 1980s. Most of the people I pass on the sidewalk are under 40. The oldest population in the world is Japan with a median age of 44. The U.S. median age is seven years younger. And Brazil is seven years younger still. And it’s also more solvent with a debt-to-GDP ratio of 66%, compared to 104% in the U.S. “Brazil has a young population,” Felipe says. “We want to make money. We don’t want government to get in the way.” After the extreme disruption of the ’80-’97 period, Brazil enjoyed two decades of growth and relative stability. Fernando Cardoso’s new currency was steadfast. The economy was still booming when Lula da Silva took over. “Lula was smart,” Felipe tells me. “He appealed to the left and he spent more money. But he left the economy in working order. By 2010, the unemployment rate had fallen to just 5%.” Recommended Links – Read this BEFORE you buy gold or gold stocks (this offer ends tonight) Dr. Steve Sjuggerud Reports: Most investors don’t know this, but there’s a “Magic Number” that appears before EVERY big move in gold and EVERY big move in gold stocks. What is it and is now the time to buy? Details here… this special offer goes offline tonight.  — Must-See Before Midnight! Until midnight, you can access our newest, premium research service–Crisis Investing–at the best terms we’ve ever offered. Bottom line: we’re so confident this service can show you how to build a fortune from the crisis Doug Casey sees coming…we’ll “pay” for $3,500 of your membership fee. Click here now for full details or miss out. Dilma Rousseff was either less competent, or less smart, depending on whom you talk to. Indisputably, she shifted the economy toward a more crony-oriented capitalism. Government borrowing increased. Social programs became more expensive. Now the deficit is running at nearly 11% of GDP. The current account deficit is another 3%. Together, that’s a 14% deficit. “Dilma is fundamentally a Keynesian,” Felipe concludes. “She stimulated the economy even though unemployment was only 6%. Government spending has gone up to 20% of GDP. And consumer price inflation has gone up to 10%.” But now Dilma is out while the legislature sorts through her impeachment. Stepping into her place with what promises to be a more market-friendly government is former Vice President – now actingPresident – Michel Temer. Rodolfo Amstalden, one of our top “big picture” analysts in Brazil give us the local view: “Temer has the chance to produce huge economic gains with only a few steps, even in a short period.” For a Brazilian, Felipe and his team think they know just what to do: buy an inflation-indexed bond – an NTNB – with an inflation-protected yield of 6.3%. For a foreigner, there is an additional risk – the currency risk. “The carry traders are borrowing cheap in the U.S. or Japan… buying these bonds… and hedging the currency risk with futures. It’s working out well for them. Especially for the Japanese. They’re getting a good net yield plus they’re making money on the falling yen. “But it’s not something for most investors.” “So what should my readers do?” I ask on your behalf. “Wait. This is another situation similar to what Paul Volcker faced in the U.S. in 1980. You had an inflation rate of 13%. Volcker had to get ahead of it. And he was extremely unpopular at the time. “But Reagan stuck with him. And he turned it around. You then had the biggest bull market of all time… starting with stocks trading at barely five times earnings in 1982… up to 43 times earnings in 1999. That was the time to get in and stay in. “A repeat of that is almost impossible in the U.S. today. You need high interest rates and low stock prices to make it work. And we have that in Brazil.” Regards, Bill Editor’s note: TONIGHT is your last chance to take advantage of the best offer we’ve ever made for our Crisis Investing newsletter… Right now—while the doors are still open for a few more hours—you can get access to the very best crisis investing opportunities in the market at the lowest price you’ll ever likely see. 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