“Brazil is the Country of the Future — and Always Will Be?”

If you know anyone from Brazil or anyone who travels there frequently (like my brother-in-law, Dave, who goes to Rio de Janeiro every fall), you might have heard at some point or another the popular jeer, “Brazil is the country of the future — and always will be.”

Yesterday’s news that Brazil intended to sell $500-millon worth of 8.25% bonds maturing in 2034 got me thinking about Dave’s annual vacation and whether or not there’s any truth to the popular joke about Brazil’s future.

Let’s take a quick look at a laundry list of a few of the nation’s economic stats:

— Brazil is the fifth largest nation in the world, in terms of population, with a whopping 175 million people — Since September, Brazil’s central bank has raised interest rates nine times to 19.75% — Inflation in Brazil over the 12-month period to May 13, 2005 was 8.19% — The country’s unemployment rate stood at 10.8% in April — In the most recent quarter, GDP grew 5.4% — Inflation slowed in May (to May 13) to 0.83%, from 0.87% in April and 0.74% in March — The country’s overnight rate is at its highest level in 19 months — Brazil’s currency, the Real, has seen a 2005 gain of 9.7%, representing the best performance of any currency against the U.S. dollar among 16 major currencies — Brazil companies on the São Paulo stock exchange reported record profits for the first quarter, with a net income of approximately US$5.1 billion, up 61% from 2004 — International market liquidity of late has allowed Brazilian companies to improve their debt structure

I think it’s obvious from the above list that the Brazilian economy is in a major turnaround. There’s no question that Brazil is becoming a stronger economy in the global market, but it clearly has some work ahead, too.

It’s simple to see why. While moderate inflation is a normal response to a growing economy, hyperinflation causes people to lose confidence in their currency. Of course, as loyal readers of this e-newsletter, you already knew that, didn’t you?

With interest rates in Brazil at a staggering 19.75%, the government doesn’t have any more leverage to keep the cap on inflation. This fact, combined with the high unemployment rate, also means that the line is getting wider between the country’s rich and poor.

For investors in Brazil, the climate also needs to see some change. New bankruptcy policies in the works should help companies with loan recovery, but regulatory uncertainty is still keeping individual investors away from Latin American investments, in general. Investors need to see new policies in this area, as well, to bolster confidence.

Fitch ratings agency has upgraded its ratings on 11 Brazilian companies over the past 12 months, and downgraded only one, but, personally, I’d want to see inflation level out for at least a few more months before I’d invest my hard-earned dollars in this country.

A brave few PROFIT CONFIDENTIAL readers may be more than a little interested in those just-announced government bonds, which, by the way, are rated at four and three levels below investment grade by Bear Stearns and Deutsche Bank, respectively. For those readers, keep in mind that it seems as though Brazil’s rise to the country of the future is still at least a few years away.

Back to Michael for Some Closing Comments

Why I feel sorry for retirees: My parents both arrived here from Italy in the early 1950s. By the time they met, settled down, bought a home, and started a business, they had two mortgages. One mortgage was on their house; the other was on their business. In the early 1970s, they paid high interest rates on their mortgages. Those with debts in the early 1980s paid even a steeper price to borrow money.

Fast forward to today, and many of those that had borrowed at annual interest rates of between 10% and 20% are now retired, getting only 3% to 4% on their money from bonds. When they had to pay, they paid dearly. When they had to receive, the wind blew. And that’s why I feel sorry for retirees today — even if you have plenty of savings, the income just isn’t there. The more I think of the old adage, “the public be damned,” unfortunately, the more I believe it’s not just the stock brokers doing the deed.