Brazilian Rate Hike in March?

The dollar bulls were celebrating again on Friday, as the dollar rally continued. The recent strength in the US dollar will probably continue this week, as it looks like it will be fairly uneventful as far as data releases. We won’t have any reports out in the US today, and tomorrow will only bring the wholesale inventory number. Wednesday we will see December’s trade balance along with the monthly budget statement for January. Both of these numbers will likely reflect an ever-growing deficit here in the US, with a $50 billion monthly budget deficit, and a trade deficit just below $35 billion.

Thursday we are scheduled to see the retail sales numbers for January along with the weekly jobs data. And on Friday, the only piece of data we will get is the U of Michigan confidence number, which is expected to show a slight improvement. So with no ‘major’ reports scheduled for the week, the dollar will likely stay in a fairly tight range.

Only three currencies managed to move higher versus the dollar Friday, the South African rand (ZAR), Canadian dollar (CAD), and Norwegian krone (NOK). These are all commodity currencies; and will continue to benefit from a stronger global economy. The rally of the South African rand was helped by a statement made by one of their central bank members who suggested that the South African economy was basically unaffected by the global recession. South African Central Bank Deputy Governor Xolile Guma suggested that rates may be heading higher in South Africa, as further stimulus measures weren’t needed.

Another commodity-based currency, the Brazilian real (BRL), managed to hold steady versus the US dollar on Friday, and is beginning to move higher in European trading. I read a news story this morning that suggested Brazil’s biggest banks are betting on interest rate increases by mid-March. The Brazilian central bank will be meeting on March 17th, and many now believe it will become the first Latin American country to raise rates. If rates do move higher in March, it will be the first increase since September of 2008. An interest rate increase will make it very hard for the government to keep a lid on the appreciation of the Brazilian real.

Higher interest rates are one of the reasons Pimco’s co-chief investment officer El-Erian has been suggesting investments in Brazil. El-Erian has been trumpeting Brazilian bonds as one of his top picks for 2010. Interest in these bonds is heavy, as they were one of the top topics of conversation among investors at the Orlando Money Show. Chuck mentioned them in a couple of his presentations, and attendees were eager to learn more about these short-term bonds with pretty good yields. I know the phones were busy on the desk Friday, and many of these calls were probably people wanting to talk to Don Ries regarding these short-term Brazilian bonds. If you are interested, just call the desk and Don will give you the details, but please be patient, the yields on these bonds shouldn’t be falling dramatically over the next few days.

I got a chance to do some research on the flight home from Orlando, and was surprised by some economic data that I ran across in The Economist magazine. As you all are aware, the debt problems in Greece have really gripped the markets lately. The mainstream news media has, in my opinion, blown this whole Greece thing way out of proportion. Chuck continues to try and explain how the problems in Greece are no more of a threat to the EU than the problems in California are to the US (more thoughts on this from Chuck in a second). But back to the data which was a real eye opener for me on the plane…

The Economist had a chart that compared economic data for over 50 developed countries. Which country do think had the worst budget balance as a percentage of GDP in 2009? Greece? Spain? No, it was the UK!! Yes, Britain’s budget deficit was 14.2% of their GDP in 2009 according to The Economist. This compares to Greece, which had a budget deficit of 13% of GDP, and Spain, which ran a deficit of 11.8% of GDP in 2009. The combined euro (EUR) area had a budget deficit of just 6.9% of GDP, but from all of the media hype you would think the debt problems with the PIGS was so massive that a default was all but guaranteed. The data shows that investors should be more concerned about the debt levels in the UK than those in Greece or Spain!

And do you know the only other country that reported a double-digit budget deficit as a percentage of GDP for 2009? It was the US, which ran a deficit equaling 10% of GDP. Yes, the US is one of only four countries with a double-digit deficit. Even Venezuela had a better deficit number than the United States. But you won’t read much about it in the press; they are too busy concentrating on the destruction of the euro and the problems with the PIGS.

As I mentioned earlier, Chuck had to spend an extra night down in Florida and he sent me these thoughts to share with readers this morning:

“Here I am in my hotel room, Saturday night. The Money Show ended today, with my last presentation only drawing about 50 people, in a HUGE room… It really made me re-think my decision to stay the extra day to do that presentation! For, here I am, everyone else has gone home, and I’m left to my thoughts… Uh-Oh, I hear you saying… And you should! For I am going on a long diatribe to discuss what I feel to be one of the grossest misunderstandings by people/investors/markets… EVER!

“Oh, sure, this would have to be quite the misunderstanding to be greater than: the tech bubble, the housing bubble, the raping and pillaging of our hard earned money with unconstitutional taxes, and so on… So, maybe, I’ll have to pull that statement back a notch or two!

“The misunderstanding I’m talking about here is the complete ignorance of what is going on in this country, and why one country gets knocked around for having problems that are miniscule when compared to the other country that gets rewarded!

“First… I’m going to quote my friend, David Galland, regarding deficits…

“‘One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.’

“And this.

“‘Furthermore, with the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.’

“Now… I’ll quote Bloomberg

“‘Jan. 20 (Bloomberg) – Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What’s peculiar is the relative inattention to the balance sheets of state and local governments.

“‘Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable.’

“So… Now we know that the deficit path we are on, is NOT going to change… And that the states in the US are in deep dookie!

“And that brings me to the trade that has been going on for two months now, regarding investors all over the world, punishing the euro, for the problems of the states called Portugal, Italy, Greece, and Spain, or… The so-called PIGS! The Euro-state that most investors point to is Greece… Which, as I told you on Friday, accounts for 2% of the Euro-zone’s total GDP…

“A friend of mine, at THE Business newspaper of the world, sent me a note on Friday, and said, ‘Hey, Chuck … Was just reading today’s Pfennig and saw your comment about the size of Greece compared to EU, and the size of California compared to the US.

“‘Did a bit of research for you and… California’s economy is about $1.6 trillion (as of January 2007), according to US Dept. of Commerce. US economy, according to CIA fact book, is about $14.25 trillion on 2009 estimates.

“‘Thus, California is about 11% of the US economy – roughly speaking, given that the dates are slightly mismatched, and who knows how accurate these government organizations are.

“‘But any event, it’s clearly much bigger than Greece’s impact on the EU.’

“So… California, which I would consider to be bankrupt – for crying out loud, the state sent IOU’s to people last year instead of cash for their tax returns – is 11% of the US problem… But we have to add to that, the research we went through above… The states of New York, Michigan, Illinois, and so on! This is a debt debacle, folks!

“Now… I’m not saying that the PIGS problem isn’t a big deal… It is! But bigger than the US problem? NO!
“So… The dollar should not be rewarded… And neither should the euro… But the problem here is that these are the two most liquid currencies in the world… So, the normal trade is to sell one, and buy the other, as they are the offset currencies to each other… So… I would think that you would take the lesser of two evils, don’t you?

“OR… If that doesn’t float your boat, you probably are eligible to join the legions of people who are finding that gold is the best replacement for either!

“Thank you for your time this time till next time… “

I always appreciate it when Chuck sends me his thoughts; he asks me to phill in for him, but then ends up writing most of the Pfennig for me anyway! I think he is bang on with his thoughts on the misdirection the administration and the media is pushing on the US citizens. They have used the problems with the PIGS to try and take our attention away from those right here at home. So far they have been successful, but double-digit budget deficits in the UK and US will eventually force us to stand up and take notice. The administrations of the UK and US will eventually have to deal with these budget problems, and their currencies will be taken to the woodshed just as the euro has been taken down recently.

The Daily Reckoning