Take physic, pomp

Brazil carry trade redux?

Your humble correspondent is not fond of putting question marks in title lines, but this time it’s there because it’s just an idea worth floating. The markets are taking Bernanke’s announcements of yesterday as a new chapter in this ongoing trainwreck, so maybe it’s time to shake off some of the convential wisdom about Brazil and the Real in particular and LatAm in general. The concept is based on four points:

1) Commodity price reflation due to the newly-cat-out-the-bag cheap dollars and credit. All LatAm will benefit from this of course (see previous Hugo caption) but Brazil is in the vanguard for purposes of investment.

2) Renewed strength of the Brazilian Real versus the US Dollar. Here’s the chart….

…… and apart from one isolated downspike related to the Christmas demand period, today’s BRL2.24 to USD1 is a new recent low.

3) The yawning gap between Brazilian interest rates and the USA. Even though Brazil’s benchmark Selic rate was slashed 150 basis points last week (and there’s probably more to come), the 11.25% rates on offer still look mightily juicy.

4) Emerging market money flows have not suffered this year. Here’s a chart from the guys at EPFR that shows how EM hedge fund flows have held up in the year to date compared with the indutrialized nations.

For sure the absolute amounts of money depicted by those flows are not equal, with the (they-still-kid-us-into-believing-it’s-the) developed world nations moving far more money around.

These four points, along with a few very tentative whispers in the investment world about how Emerging Markets are the new safe haven (I don’t buy that one at all..not in lands of fast-shifting political landscapes and soft currenies , but a hedge play they certainly are) all aim at the same place: Is it time to think of LatAm anew and find a spot in your portfolio for some Latino exposure? I’m using Brazil’s currency as the spearhead play here and the argument applies to other sectors and places as well. This is only for practical reasons as the market tends to use Brazil’s Real as its entry point.

The counterargument to all the above can be summed up with the phrase “Ben’s plan ain’t gonna work”, but it begs the question whether the Bernanke China Put will flat out not work, will work for a while then explode, or whatever. The carry trade idea here isn’t a long term retirement play, after all. You be the judge. DYODD.

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