The Land of the Present

Brazil is larger than the continental United States — by the equivalent of one Texas …

The great bulk of its land mass is a mostly arable central plateau with the potential to be the breadbasket for the world …

It boasts some of the richest mineral resources on the planet, including iron ore and gold …

It’s the only country in the Americas with a history that’s mostly free of violent revolutions or civil war. No Brazilian president has ever been assassinated. Even independence from Portugal and the emancipation of slaves came without wars.

It’s virtually free of hurricanes and earthquakes. And with its long coastline strictly on the Atlantic side of the continent, there has never been — and probably never will be — a tsunami. Yet …

Despite these many blessings, Brazil’s
glorious “future” never seemed to arrive.

The most persistent reason: The currency was chronically unstable. As a result, the economy was periodically ravaged by hyperinflation; the people were eternally discouraged from saving; and foreign investors always considered the country high risk.

Now, however, Brazil’s currency, the real, has stabilized. Its value has risen firmly and steadily from a low of 25 U.S. cents on October 10, 2002, to a high of 37.4 cents just last week, its best level since June of 2002.

According to the World Trade Organization (WTO), in the last 12 months (November 2003 to November 2004), Brazil’s trade surplus has surged by 33%, the second best improvement among developing nations. The only nation to do better was Russia, due primarily to the surge in oil prices.

As a result, Brazil added $21 billion to its reserves in 2004, the largest such increase in its history

Overall, Brazil’s economy in 2004 has grown by an estimated 5.1% (after deducting inflation) … inflation was contained to 6.5% … and the trade surplus is now 5.5% of GDP — similar in relative size to America’s trade deficit.

Compare that to 1963, when Brazil’s economy barely managed to grow 0.6%, inflation was galloping at 80.5% per year, and the trade surplus was a feeble 0.5% of GDP …

or to 1981, when the economy contracted by 4.25% while inflation surged by 90.9% …

or to 1983, when the economy shrank by 2.93% and inflation hit 164.1% …

or worst of all, to 1992 which brought another decline in the economy with an unbelievable 1,129% inflation!

In fact, based on these three criteria — GDP, inflation and trade balance — Brazil’s overall results for 2004 are the best in 54 years: This is the first time since 1950 that the economy has grown more than 4%, inflation has been contained to single digits and the country has run a trade surplus, all in the same year.

So today, for the first time since I began coming here a half century ago, I am finally ready to recommend Brazil to American investors willing to take some risk. And I don’t recommend Brazil strictly as an investment worthy of your money. It’s also a place worthy of your time — to see the countryside, learn the culture and make yourself feel at home. For starters …

Let me give you a brief, personal tour …

Almost every December, Elisabeth and I stay on the farm, four hours inland from the coast, to spend the holidays with her family. From right to left in my first photo, they include her Mom, our grand-nephews and grand-niece, their parents, plus MANY others who weren’t around for this particular snapshot.

It all started nearly 115 years ago, on February 3rd, 1889, when Elisabeth’s great-grandfather, Antônio Dias Pacheco, bought the farm’s 9,000 acres, producing everything you’d need for a cup of café com leite — coffee, dairy cattle and sugar cane.

As the farm was handed down from generation to generation, spanning three centuries, it was naturally divided and subdivided, reducing it to less than 1,200 acres today. But fortunately, given today’s more modern agricultural technology and thanks to the proximity to the São Paulo metropolis, that’s still a viable size.

Also fortunately, about forty years ago, the family donated the use of the farm’s river valley to a nearby town, which, in turn, transformed it into a long, winding reservoir of crisp, blue water, where my son Anthony and his cousins, now the fifth and sixth generations since the first Antônio, often accompany me for kayaking and swimming.

Usually, Elisabeth and I stay on the farm and go nowhere else in Brazil. But this year, we were able to get away twice — first to Campos do Jordão, the highest city in the country …

and then to a little-known beach cove nestled between two hills on the state’s northern Atlantic shore.

Yesterday, back on the farm, we took my mother-in-law and my grand-nephew, along with Buzundungu (our little daschhund) to the reservoir. Buzundungu thinks he can catch fish simply by jumping out onto the rocks and snapping at them. But then he always seems to get stuck and needs coaxing to return to shore.

Investing in Brazil

As I watched his little struggle, it reminded me of strategies to avoid for investing in Brazil: It’s probably not a good idea to leap first and ask questions later. Nor does it make sense to jump for esoteric investments which are easy to buy but hard to sell.

Yes, there are great opportunities, for example, to buy amazing beach front property … to start new, innovative businesses … or invest directly in the booming São Paulo stock market. For now, though, you need to start closer to shore with instruments that you understand and you’re completely comfortable with — such as U.S.-based stocks and mutual funds that are tied to Brazil.

I provide more details in this month’s Safe Money Report, which will be available on the Web to current subscribers on Friday, January 7.

For now, suffice it to remember that these investments are not risk free: If the Brazilian market goes down and/or the currency slides, you CAN lose money. But if there was ever a low-risk-high-potential opportunity to allocate a modest portion of your portfolio to Brazil, I think this is as close as you’ll get:

* The Brazilian stock market has been mostly stronger than the S&P 500.

* After deducting inflation, interest rates in Brazil are now about 10% or close to five times higher than the equivalent interest rate in the United States even BEFORE deducting inflation.

* And as I mentioned a moment ago, the Brazilian currency, the real, has been moving steadily higher for over two years, with no end in sight.

In one sense, you might even look at the real as kind of proxy for the euro. Except for a few months here and there, it’s been mostly in synch with the European currency since the euro hit bottom two and a half years ago. And, as Brazil shifts more of its trade to Europe and Asia, its currency may actually be on its way toward joining the ranks of those that are outside the “dollar zone.”

Don’t get me wrong. Brazil is not a trouble-free paradise and never will be. It’s a dynamic, complex nation with a population that’s no less diverse than ours — and social problems that are no less complex.

For investors, however, I think the most important factor to watch is Brazil’s domestic investment index, which measures the average value of investments in machinery and construction equipment as a percent of the country’s GDP.

The index is published quarterly by IBGE, Brazil’s Institute of Geography and Statistics. And in their latest release, reflecting the third quarter of 2004, the index has surpassed a critical watershed, surging to 21% of GDP, the highest since 1991. Meanwhile, the national savings index has also surged — to 25.3% of GDP, the highest in nearly two decades.

In all the years I’ve been visiting and watching Brazil, I’ve never seen anything quite like this. The country, mostly drifting for so long, seems to finally be finding its way.

I wish I could say the same for the United States.

While Brazil’s currency is gaining, our dollar continues to sink, falling still further against the euro and other currencies since I wrote to you two weeks ago.

And while Brazil’s trade balance continues to pile up a larger and larger surplus, ours sinks deeper into a deficit which is now the largest of any country at any time in recorded history.

This is serious — so much so that, quietly and behind the scenes, experts at S&P, Moody’s and Fitch are beginning to question the triple-A-plus rating the United States has always enjoyed on its sovereign debt. Right now, it’s just talk — no one is seriously thinking about an actual downgrade. And I don’t expect one any time soon.

But it’s frightening nonetheless. If the bonds of a country like Brazil are downgraded, the world goes on. But if, someday in the future, the bonds of the United States government are downgraded, the impact would be devastating. You’d likely see a series of downgrades of government securities of dozens of nations and a panicky flight from government bonds of all shapes and colors.

These are also the kinds of trends that drive investors out of paper currencies into gold and other natural resources. As a country steeped in natural resources, I think Brazil will benefit from these trends, although it’s certainly not a one-way street, with pitfalls along the way.

The same is true for other alternatives to the dollar. Over the last couple of months, oil has come down quite a bit from its 2004 peaks. And last week, gold took a dip, too.

But these setbacks are temporary. Despite the ups and downs, I see no change in the fundamental, long-term trend driven by the most powerful and least understood force of our time — the falling U.S. dollar.

Wall Street continues to ignore
the falling dollar. But you must not.

Don’t assume that the falling dollar comes without consequences for your stocks and your bonds. And don’t assume it will stop falling strictly because it’s already fallen so far.

The dollar decline is just beginning to accelerate.

No, you can’t exit the dollar entirely. You still need to keep most of your money safe; and for American residents, the safest place is still in U.S. Treasury bills or money market funds specialized in short-term Treasuries. Although the interest is still disappointingly low, the safety and liquidity remain unbeatable.

Then, with money you can afford to risk, the best bets today are investments that are gaining as the dollar is falling — investments tied to the euro, the Canadian dollar or the Brazilian real … and/or to oil, gold and other natural resources. Stick with them and you should have a prosperous 2005.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

Martin Weiss and “Martin on Monday” are non-partisan. Third-party ads do not necessarily represent their opinion and should not be interpreted as an endorsement.