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With it’s New, “Investment Grade,” Brazil is Hitting the Town and Buying…Dollars?

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With it’s New, “Investment Grade,” Brazil is Hitting the Town and Buying…Dollars?

Post by Sean on Sat May 10, 2008 12:44 pm

With Its New "Investment Grade," Brazil Is Hitting the Town
and Buying...Dollars?


Today's commentary is by Sean Hyman, Currency Analyst for The Sovereign Society.

Good day Currency Traders!

Brazil has had some good fortune lately. Just last week, Standard and Poor's upgraded the entire country and nine of Brazil's banks to "investment grade."

Almost immediately, pension funds and hedge funds from around the world poured money into this BRIC nation. In fact, Brazil sold over US$500 million in bonds to these hungry investors. That doesn't even count the investment assets that poured into Brazil's stocks, real estate, etc.

Brazil's tax revenue also jumped 13% just last month alone. Household income has increased, unemployment has gone down, and their booming real estate market has all added new money into the government's coffers.

Brazil's Number Finally Comes Up

Brazil has made huge strides in recent years. Just 20 years ago, Brazil was an entirely different country.

The largest economy in South America was drowning in debt. The Brazilian currency - the real - was practically worthless. And even in the 90s, Brazil was still trying to get its act together and dig itself out of years of debt.

Today, it's a completely different story. For the past decade, Brazilian officials have capitalized on its expanding commodities and completely rebuilt the economy from the inside out.

And now, Brazil is one of the hottest emerging markets on the planet. I believe Brazil will continue to soar for years to come. I say that because Brazil's economy expanded 6.2% in just the fourth quarter alone (when other economies around the world were slowing). That's the highest growth rate since 2004.

Brazil's currency, the real, has now gained 28% against the buck in the last four years. That's the very best performer of the top 16 currencies of the world.

And right now, things have never been better for Brazil. Petrobras, Brazil's state-owned oil company, is hiring another 14,000 engineers, geologists, and drillers as they tap into the biggest crude discovery in the Western Hemisphere since 1976.

In fact, this latest "oil find" may allow Brazil to overtake all of OPEC's output with the exception of Saudi Arabia. So this will be huge. It will provide a huge base going forward for Brazil to divert some of their oil money into other viable investments.

Brazil's New Sovereign Wealth Fund
Now Has Money to Spend

Money just keeps pouring in as the demand for Brazil's bonds, stocks, and commodities continues to pump money into their economy.

So what will Brazil do with all this new found money? Brazil's reserves have already doubled since 2006 to a whopping US$195 billion. Not bad for a country that had trouble paying its debts just a few years ago.

Brazil's policymakers have considered many options lately. Rather than touch their US$195 billion in reserves, they have decided to start a US$20 billion Sovereign Wealth Fund (SWF). This new SWF would take this new-found wealth and diversify it into many different investments.

What's the plan now? First, Brazil's policymakers will use the proceeds from the recent bond sale to pay off more expensive debts. Then they're planning to build their Sovereign Wealth Fund. They've already announced they're investing at least part of that US$20 billion in U.S. dollars.

Brazil's policymakers are also planning to use part of this money to buy rivals overseas, fixed income assets, and finance companies seeking to invest in their operations.

Brazil is becoming more solid all the time. And as they diversify their income streams, Brazil's leaders will just create a brighter, more stable future for themselves.

I find it interesting that they feel buying dollars at this point in time is a worthwhile investment. You only buy things because you think they will go up in value...as far as investments are concerned.

Long-Term Dollar Bear Says
We Could Have a Short-Term Rally

Even the epic dollar bear Jim Rogers agrees there could be a short-term dollar rally. He estimates that it may only last about a year. He's going to use that dollar rally to finally exit his dollar denominated assets.

He also stated another reason why the U.S. dollar may rally for about a year: America is a huge agriculture producer. The world is in dire need of agricultural commodities, so our American farmers are going to pick up the slack where the economy has fallen.

So in the near term you can see that both Brazil and Jim Rogers are betting on the greenback.

Now in the longer run, Rogers believes the commodity dollars (Australian dollar, New Zealand dollar, and the Canadian dollar) will do better than those that aren't commodity exporters during this commodities boom. In fact, he especially emphasized his Aussie dollar position (and since Brazil is also a "commodity currency," I believe it will prosper right along with these others that Rogers has listed).

So don't get me wrong, over the years, the dollar will have problems. But in the next few months, there's money to be made by investing in dollars and Brazil knows it.


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