The Rising Influence of Rising Affluence

[flatlander_60048]

The extreme US$ strength was the primary reason I was touting SBS last Aug-Sept. The ADRs have done very well while the dollar has weakened. I expect that this mean reversion correction might continue while the Brazilians move toward impeachment of Rousseff and the US primaries continue with no candidate seriously addressing the debt to GDP ratio or the entitlement overhang/demographic issues. If the Republican convention results in a Ryan nomination (after many ballots) I'd sell SBS since he will be viewed as a fiscal hawk, resulting in likely dollar strength. On the other hand I believe Sanders would result in accelerated dollar weakness, since the funding to support the expansion of social programs is not apparent.

On the other side of the coin, the Brazilians are also moving to get rid of the VP as well as Rousseff. If this process shifts to the right towards a centralist as Argentina has done, it will be viewed as a positive, internationally. Interest rates appear to be peaking and political reforms with the combination of interest rate cuts could provide a long lasting tailwind. This is occurring at a time when a considerable portion of the developed world central banks have empty tool boxes resulting in experimentation in negative rates. This is not meant to suggest that Brazil does not have lots of problems. They definitely do, however their problems (primarily stagflation and graft) have been seen relatively recently and the Volker playbook has been proven to be an effective strategy to dealing with stagflation. The graft issue will take a political reformist.

The weak Real will help correct some of the trade issues. The Baltic Dry index is up strongly in the past two weeks. Brazil is likely to be a strong beneficiary of this move. I think Rousseffs foes realize that trade deficit improvement might help Rousseff, so I expect them to press the impeachment hard now while the discontent fires are burning.

http://www.bloomberg.com/quote/BDIY:IND

Regards FL

Disclosure - I consider myself to be a political independent and don't mean to stoke any political discussions. We are in a very currency driven market, so I just want to try to discuss some factors that might influence the direction of this emerging market.