Monday, December 14, 2015

Evaluating Brazil

By Doug Casey

Editor’s Note: Casey Research originally published this article in January 2013. We’ve updated it with new, timely commentary. Doug’s analysis of Brazil is still vital today. They are timeless lessons on what happens to a country when a currency collapses.

Let’s explore Brazil, the “B” in the BRIC countries. It’s been getting a lot of applause as the new breadbasket of the world, and Brazilians are viewed as taking their place among the world’s new rich guys. I recently spent a week in São Paulo. I’d been to Brazil a half dozen times over the years, but never to São Paulo, a gigantic city that could easily be mistaken for L.A., except that it lacks the charm, is said to have vastly more crime, and speaks Portuguese, not Spanish. I was there to play in the Brazil Series of Poker, but also because I just wanted to see the place, since it vies with Mexico City to be the biggest agglomeration of people in the Western Hemisphere and is one of the biggest cities in the world. And it’s only a two hour flight from Buenos Aires.

It’s fairly easy to generalize about the other countries in South America. They’re all quite different from one another, but, relative to Brazil, each is small and homogeneous. For an American, getting to know Brazil is much harder than for a Brazilian to get to know the U.S. For one thing, it’s vastly more difficult to get around; you’ll basically have to fly everywhere. And the country hasn’t yet been homogenized with the franchise clones making cities and towns indistinguishable from one another. Brazil is a veritable subcontinent. Let me recall a few facts that almost everybody knows (and therefore are hardly worth mentioning), and also some that relatively few know (and that may, therefore, offer you some edge).

Brazil is somewhat larger than the continental U.S., has 5,000 miles of beachfront, and 190 million people. Nearly half of them are concentrated in the southeast, in just 10% of the country’s area. The countryside there roughly resembles Georgia in the U.S. One-third of Brazil’s GDP comes from in and around São Paulo, which is the functional center of the region. That city is where the action is, but it truly has no soul. It’s almost entirely of recent construction; what’s left of the quaint old downtown is now just a hangout for beggars, bums, and pickpockets. I consider the burg devoid of attraction, unlivable, and have no urgent desire to go back.

Only businesspeople go to São Paulo; tourists go to Rio, a much more appealing place. Surprisingly, Brazil only gets about 5 million tourists a year, and most of them are from neighboring Argentina. This is a very low number. France gets 80 million, the U.S. 60 million, Thailand 20 million, and Singapore 10 million. Cuba and Uruguay get about 2.5 million apiece. Even Syria reported 5 million in 2011 - a number I find hard to credit and which may include numbers of tourists who are heavily armed. Further proof you have to take all government statistics with a grain of salt; all the bureaucrats know is what someone casually puts on a form.

The good news is that a tourist number as low as Brazil’s can only go up, which is favorable, unlike most of what I’ll have to say about the place. And it will go up, because they’re hosting the FIFA World Cup soccer contest in 2014 and then the Summer Olympics in 2016. It’s completely unclear to me, however, where they’re going to put all the sports fans or how the visitors are going to get around and get on generally, even though the government plans on spending $20 billion on stadiums, airport upgrades, and road building to accommodate the crowds. Most of the money will inevitably be frittered away on monument construction, as opposed to things that make life easier or more pleasant.

Doug Casey: You might want to read my editorial about the ongoing FIFA so-called scandal.
I haven’t found Brazil to be convenient for anything. It’s extremely difficult to find a place to exchange even dollars - forget about other currencies. Except at major hotels, where you’ll pay a 15% fee. But there aren’t a whole lot of hotels, reflecting the low number of arrivers. And the average Brazilian speaks only Portuguese, although kids are learning either Spanish or English in schools. But how well did you speak a foreign language when you got out of high school? If I didn’t have some Spanish (which is much more comprehensible to a Portuguese speaker than vice versa), I would have been reduced to hand gestures.

That’s apart from the fact that illiteracy is officially figured at 10%, although my guess is that it’s much higher.

Demography, Cities & Race

São Paulo is different from Rio in every aspect. It’s flat, as opposed to mountainous. It’s non-centered, with numerous subcities, rather than being focused on the beach. It’s purely about business and getting ahead, as opposed to having a good time. Both cities are famous for their high rates of violent crime, emanating from the favelas, which are the shantytowns that ring all the major cities. They originated in the ’50s, when poor people started moving into the cities looking for opportunity. The cities were much more pleasant and more livable before the favelas arose - but they’re actually good things. They’re the first step to urbanization. And in the Third World, that’s essential for increasing literacy, improving incomes, and slowing the production of waifs and street kids.

When you think of the favelas, you might imagine the population is swelling. Just the opposite, actually. As people move into the cities, they redirect their attention from family to work, and women take advantage of modern birth control. Women find jobs, and there are few grandparents around to help raise the kids - who are now seen as an expense, as opposed to cheap labor for the farm.

So here’s a shocking statistic. As late as 1980, the average Brazilian woman had four children; the country was in the midst of a population explosion. As of 2011, however, the average was down to 1.8. The government estimates that in 15 years, it will drop to 1.5, which is far below the replacement rate of 2.2. This is happening almost everywhere in the world now, not just in Europe, North America, China, Japan, and other developed countries. The implications of this trend - which I believe will accelerate worldwide - are profound. But that’s for another article. Brazil is now essentially an urban country, with almost 85% of its 190 million inhabitants living in towns and cities.

The degree of urbanization relates not just to the birth rate, but to other phenomena, like racism and even slavery. Brazil has long had a reputation as a non-racist society. I think that’s true, even though it was the last major country in the world where the slavery of blacks as a group was abolished, in 1888. An event which is, in my view, irrefutable proof that the U.S. War Between the States was neither necessary nor essentially about slavery.

One reason there’s little antagonism between the races in Brazil is that the country never had a Lincoln, or a war, to polarize them. I think there’s going to be ever more racial harmony as more people live in cities and almost necessarily start seeing each other as individuals, as economic units, rather than as members of a racial group. There was no racial hostility that I could see. Slavery is still said to exist in the Muslim world, but only on an individual, as opposed to a legalized and institutional, basis. That’s because it’s completely uneconomic today; it’s hard to incentivize slaves to work productively in a high-tech economy.
Doug Casey: Actually, it does exist. I spent 10 days in Mauritania in June, where it was only officially abolished in 1987. But it still exists. Mostly because the slaves are well treated, and don’t have a better alternative.
And common laborers, doing grunt work, are less and less either necessary or desirable. Within a generation from now, intelligent robots will be doing most menial labor, making human muscular input almost redundant. But that’s just the culmination of a trend that’s been in motion since the start of the Industrial Revolution, when people started moving into cities on a grand scale. In those days, London had its own versions of the favela, as New York City later also did.

The fact is that the southeast of the country - the area from Rio on down - is socially very European, while the rural and undeveloped northeast is quite African. It’s mild de facto segregation. At the poker tournament I played in, there couldn’t have been more than 10 blacks among the 1,800 players. That’s partly a reflection of São Paulo’s demographics (even though, as a national event, people were from all over the country) and partly because the 1,800 real (US$900) entrance fee was prohibitive for those who aren’t solidly in the middle class. And in Brazil, that still leaves out almost all the blacks.
Doug Casey: You’ll notice the real has lost over half of its value in only three years. This is one reason why the average person here - who saves in reals - can’t get ahead.
But a rising tide raises all boats. The question is: What’s going to happen to the economy in Brazil? And how can you profit from it?

The Economy

Brazil has, from its very beginning, been plagued with dirigiste government. When it comes to papers to fill out, stamps and approvals to garner, layers of taxes to pay, and bureaucrats to soothe, it may be the worst place in Latin America. I think anyone who runs a business in the country is both a saint and a hero, although that’s becoming the case almost anywhere. The country has done as well as it has mainly because it’s so big, and Brazilians are used to dealing with Brazilians, mostly within Brazil.

The place has a lot of native wealth. You’d think it almost couldn’t help but be prosperous. But that would be untrue, as demonstrated by the Congo, which is a basket case despite being at least as rich in resources as Brazil; and with the counterexample of Japan, which is extremely wealthy despite having no resources at all except its people. Brazil is midway between them. For what it’s worth, the largest Japanese community in the world outside Japan lives in Brazil.

Except for the very recent past, the country’s history is all about dictators, military governments, and currency destruction - but its promoters overlook these things. You might think history would have taught Brazilians a lesson and shown them what not to do, so that they don’t repeat the same mistakes. But that’s not the way it seems to work. Instead, every disaster becomes ingrained as part of the culture. I admire the makers of the surreal movie Brazil for capturing much of the essence of the place.

There’s an old saying about Brazil: It’s the country of the future - and always will be. That may be true partly because it’s a closed economy and always has been. Brazil is essentially an island, cut off from the rest of the continent by a jungle. And the southeast, the developed part of the country, is cut off from the interior by the highlands. And it’s rather unlikely that a bridge is ever going to cross the Amazon anywhere near the coast; the river’s 200 miles wide at its mouth. The place could plausibly be at least two or three different countries. Brazil’s mainland links to the rest of the continent are Uruguay and Paraguay - both small, quiet, backward countries that offer little in the way of trade possibilities but do present a language difference.

China is now Brazil’s big export destination for iron ore, soybeans, beef, and chicken. But the China bubble is overdue to burst, and the country’s imports of iron ore are going to collapse. Brazil will feel it especially, partly because of shipping costs, since it’s literally on the other side of the planet from China, and partly because producing anything in Brazil has become expensive.

Iron ore neared $200 a tonne at the peak of the recent boom, up from about $20 at the 2001 bottom. It probably costs Vale, by far Brazil’s largest producer and largest company, about $40 to produce the stuff and perhaps $20 more to ship it. The ore currently trades at around $120 in China, but I don’t see why the price couldn’t collapse to less than production cost. Further, Australia not only produces the stuff for less than $30 a tonne, but is much closer to the Orient, so the shipping cost is half of Brazil’s. Vale is a heavily touted stock today. I wouldn’t touch it, for that and other reasons covered below.
Doug Casey: This, I’ve got to say, was an accurate call.
Brazil’s second-largest trade partner is the U.S. But what’s going to happen as the U.S. economy winds down? Third is Argentina, where exports are already collapsing because of the Kirchner regime. But it’s really incorrect to think of Brazil as a major force in trading. According to World Bank data, Brazil’s exports in 2011 amounted to only 12% of its GDP. The figures for Russia, India, and China were, respectively, 31%, 25%, and 31%. A few ag sectors qualify as exceptions, but overall the country is an isolated, self-contained island.

Brazil has made real progress over the last 13 years, since the bottom of the commodity cycle in 2001. Average prices of its commodities have gone up 2.5 times, and volumes have grown 50%. National income has boomed, more than trebled, in real terms. So, of course, the country has done well. But mostly for reasons extraneous to itself.


Over the last two decades, Latin America has become an increasingly important supplier of agricultural commodities to the rest of the world. In 1980, Latin America accounted for 30% of global soybean exports (oilseed, meal, and oil); in 2012, it accounted for over 60%. That’s mostly Brazil, in that while Argentine production has risen, punitive taxes under the Kirchners have kept it from rising by much. U.S. producers, meanwhile, have lost half their market share. Brazilian corn exports have gone from 11% of the world total in 1980 to 29% in 2012, while U.S. export numbers have collapsed due to the insane policy of turning corn into ethanol fuel.

Brazilian export numbers have boomed for coffee, sugar, beef, chicken, and orange juice as well. So a major argument by Brazil promoters is that it’s become the world’s food storehouse, and it’s going to grow from here. Unlike many of their arguments, this makes some sense, I think. But it’s not a good enough reason to invest there anytime soon.

Over the short term, global demand for agricultural commodities is likely to increase because, despite the downturn in world economic growth, world population is still going up. But even in Africa and the Muslim world, the population growth rate is slowing radically and will soon head down. The main driver for agriculture, in the long run, won’t be rising populations but rising standards of living.

Since the 1960s, world per-capita consumption of grains has increased at 0.5% per year compounded, on top of the growth in population. Planted area per capita has been declining, however, because of the expansion of the world’s cities, most of which were founded in prime agricultural areas. To compensate, new land has had to be cleared, and most of that has been in Brazil. Fortunately, advances in plant genetics, ag techniques, fertilizers, pesticides, and the like have increased production by something like slightly over 2% per year from 1970 to 1991, but at only half that rate since then. The result has been the commodity boom, mainly reflected in grains. But grains are poor people’s food. And they’re also highly political commodities, almost on a par with oil. I’m disinclined to invest in farmland for the grains.

I’m much more interested in specialty products, like grapes, olives, and other fruits. And cattle. Interestingly, cattle producers really haven’t participated in the recent ag boom, partly because they’ve been pushed onto less productive land, reflecting the weak profits for many, many years. Because of that, herds have been liquidated, and headcounts all around the world are at their lowest levels in three generations. That’s why I’m especially bullish on cattle. But that’s another story.

In the last five years, land prices in Argentina, Uruguay, Paraguay, and southern Brazil have risen 15% to 20% per annum. That’s mostly because, of course, grain prices have exploded. In the U.S., by comparison, farmland prices have only risen 10% per annum. Land in Latin America has done better partly because infrastructure had room to improve, and partly because the market is becoming ever more global because of generally lower tariffs and bigger, more efficient ships.

Will there be a worldwide shortage of arable land? I doubt it. The demand for grain is likely to flatten out. There’s an immense amount of underused farmland everywhere (especially in Africa). And I have no doubt technology will again increase productivity. So Brazil will grow in importance for food, but that’s not the bonanza a lot of promoters seem to think.


Around 400 companies are listed on Brazil’s main exchange, the Bovespa, for about US$1.2 trillion of market cap. By far the biggest are iron miner Vale and Petrobras, the national, state-controlled oil company.
Those two and 27 other Brazilian stocks are traded in the U.S. They’ve historically always traded at a discount to their foreign peers because of the country’s well-known problems - high taxes, intense bureaucracy, onerous import restrictions and duties, high crime rate, uneducated population, and subpar infrastructure.

As well as Brazil has done, it’s been a laggard by comparison to its peers in Latin America. In the last 10 years, corporate earnings in Latin America have grown on average by 18% annually. The countries that have recorded the highest earnings growth rates are Peru (28%), Colombia (23%), Chile (13%), and Mexico (12%). Brazil trails the list with 11% growth. During that time, Latin American stocks averaged a 10-to-1 P/E ratio. Most expensive (but deservedly so, as by far the most liberal economy in the region) was Chile, at 15, followed by Mexico, Colombia, and Peru with P/Es of 12. Brazil has historically traded cheaper, with an average P/E of 8. I attribute that to the country’s tax and regulatory structure.

According to the World Bank’s Doing Business 2011 report, Brazil is ranked 127th out of 183 countries for business friendliness. Mexico ranks 35th and Chile 43rd. Brazil scores particularly badly in categories related to starting a business, registering property, paying taxes, and closing a business. It’s Kafkaesque here, as in many other Third World countries, in that they make it nearly impossible to open a business (because they’re trying to protect those already in existence), and equally hard to close one (because they’re trying to protect the workers).

Say what one will about how screwed up Argentina is - and its economy is a real mess and getting worse - at least the country has a strong tradition of classical liberalism. There are a lot of Argentines who know who Mises, Hayek, and Rothbard are and who study their work; that offers some hope for a renaissance. That just doesn’t seem to be the case in Brazil.

Based on all of this, I can’t see buying Brazilian stocks. Actually, the place to look is Argentina, which currently has some of the world’s most tempting market statistics - a P/E ratio of 3 (whereas its average over the last 10 years has been 12); a price-to-book-value ratio of 0.9 (versus an average of 2.0 over the last 10 years); and a dividend yield of 13% (versus an average of 4.2% over the last 10 years). Argentina is a bargain. But, like most bargains, nobody wants to touch it.
Nick Giambruno: Casey Research originally published this article in January 2013, and the Argentine market went up by more than 200% over the next 33 months.


I’ve mentioned how brutal Brazilian taxes are. They’re a major reason everything in the country is so expensive - especially imported items. I decided to find out just how Byzantine the regime might be. Suppose you decide to import something to take advantage of the country’s vaunted growth. It had better be a highly desirable, extremely high margin item, because there are six levels of tax on imports, and they compound, each tax being levied upon the previous taxes. Nothing leaves the harbor before your check clears.

I’ll list them in the order they’re applied. On top of one another. They’re generally referred to by their Portuguese acronyms, in parentheses, to avoid confusion.
  • Merchant Marine Renewal Tax (AFRMM) - 25% of the shipping and port handling costs. Used to subsidize the merchant marine and shipbuilding industries.
  • Import Tax (II) - From zero to 35%, depending on the product. The level depends largely on which domestic industry they’re trying to protect.
  • Industrialized Products Tax (IPI) - From zero to 20%. Another protectionist tax.
  • Merchandise and Services Circulation Tax (ICMS) - This is essentially a VAT, levied by the states. It averages 18%, but ranges from zero for some “essential” items, to 25% for “luxury” goods.
  • Contribution to the Social Integration Program and Civil Service Asset Formation Program (PIS/PASEP) - 1.65%.
  • Contribution to Social Security Financing (COFINS) - 7.6%.

More Taxes

But I’ve only mentioned the import duties. The Corporate Income Tax (CIT) runs from 25% to 34%. Plus there are lots of rules regarding deals with related companies, companies in low-tax jurisdictions, and outbound interest payments. This is because, living in both a Latin culture and a high-tax jurisdiction, the Brazilians have grown expert at denying revenue to their voracious government. The government, in turn, adds more layers of rules.

Of course there’s also a personal income tax ranging to 35%. Then, on top of it, is Social Security (INSS) tax of 20%, accident insurance (SAT) of 1% to 3%, Employee Indemnity Guarantee Fund (FGTS) and Education Fund (SE) of 2.5%, plus assorted other taxes adding up to another 3.3% of income. There’s even a 10% tax on the acquisition of foreign technologies. This isn’t a treatise on Brazilian tax law, so I haven’t researched the limits, exclusions, exemptions, and deductions. But if you’re going to do anything here, you’d better have a good accountant.

Total import taxes can easily add up to 100% or more. It’s actually quite insane. Countries like Cuba and Iran complain about being placed under trade embargo and suffering from the dearth of imports. But Brazil - and, for that matter, almost every country in Latin America and Africa - effectively puts itself under embargo with its own tariffs. Brazil, Uruguay, and Argentina are by far the worst self-tormentors.

Restricting purchases to things made within the arbitrary borders of one country (almost always to subsidize some inefficient local industry) makes about as much sense as limiting purchases to things made within a state, a county, or a city - or within a city block, for that matter. What’s happened in Brazil, as with all these places, is that it’s full of uneconomic industries, which turn out relatively high-cost/low-quality products. And often with a surfeit of workers - since keeping lots of workers on the payroll is considered smart public policy. That makes it very hard to make a sensible investment in these places.

It’s all happened before. Eventually reality wins out, and out of either intelligence or simple necessity, the duties come down, the protected industries collapse, and lots of workers become unemployed. The bigger and richer a country is, however, the more mistakes it can make before its eventual comeuppance. And Brazil is a rich country. In other words, Brazil has created some artificial and temporary prosperity in exchange for a very real depression sometime in the future. Neither an individual nor a country can get rich by producing inefficiently and wasting resources.

So Brazil should be doing vastly better than it is now and be on a much sounder foundation. But first it’s going to have to liquidate a lot of malinvestment and allow the severe distortions that have built up over the decades to unwind themselves. It won’t be fun, and it’s going to happen regardless of what’s going on in the rest of the world. This is a major factor that Brazil’s lately arrived cheerleaders either don’t see or don’t understand. It’s why Brazil - as with all controlled, politicized markets - has to be treated as a speculation, not as an investment.

History Equals Culture

Let’s take a look at where Brazil has been to get a better grip on where it’s likely to go.
Brazil split from Portugal in 1822 (about the time the rest of Latin America was breaking political ties with Spain), but remained a monarchy. After independence, the head of state was styled “Emperor” until 1889. (Would the U.S. be the country it is today - yes, the description is loaded with irony - if it had been a monarchy that late in its life?) The next 40 years saw political instability, with alternating military and oligarchical governments, essentially all financed with coffee exports. In 1930, a military coup installed the Vargas dictatorship, typical of governments the world over in the ’30s in its promotion of industrialization by state-owned companies. It survived coups by both pro-Communist and pro-Nazi elements while resembling both.

Another general was elected president in 1946, followed by one headstrong statist after another promising the era’s version of hope and change, by making “50 years’ progress in 5 years.” Part of that promise included moving the capital from Rio to Brasilia, a city built from whole cloth in the middle of the jungle, in the middle of nowhere, starting in 1956. Three million people now live there, so it has been construed a success by some. I think it’s better described as an ongoing disaster and a monument to the gigantic size, complexity, and cost of the Brazilian government.

Brazil was again a military dictatorship from 1964 to 1985, with all the things that have come to be expected from a banana republic ruled by generals - repression, torture, corruption, and runaway inflation. This brings us to the current era, with the ascension of Fernando Collor de Mello in 1985, then the first elected leader in 29 years. He started a trend toward liberalization - beginning the privatization of companies like Vale, Embraer, and Telebras - and toward political moderation that’s been in motion since.

Predictably, Collor de Mello was tried on corruption charges. I say it’s predictable both because enemies of liberalization wanted to punish him and because it was inevitable that, with lots of new capital being liberated, some of it would stick to the president and his cronies. That’s what politics is all about everywhere.

A big change came in 1994 with the invention of the real, the present currency, which was initially priced at US$1.25. Brazilians were overwhelmed at the thought of their currency being worth more than a dollar, even if only for a while. Surprisingly, the currency has been managed fairly prudently, losing just 60% against the dollar over 20 years. Part of the real’s comparative durability was that Brazilians were reacting against the immense inconvenience of one currency destruction after another; part was the simultaneous partial liberalization of the economy on a number of fronts, especially imports.

But when Lula da Silva (who’d run for president twice before) was elected in 2002, the real collapsed to US$0.25, because he and his leftist party had long promised to roll back what reforms had been made and return to a more closed economy. Surprisingly, da Silva proved quite moderate. And he had the singular good luck to be elected at the beginning of the great commodity boom, which brought lots of capital into Brazil, facilitated nearly full employment, and increased the value of the real to its current two to the U.S. dollar.

It was a given that his protégé, Dilma Rousseff, would easily be elected in 2011. Rousseff used to be a communist radical, but like da Silva, she’s acted in a fairly responsible and reasonable way so far. She’s even talked about freeing the economy further and reducing some taxes. These things are possible. But so far she’s been presiding over good times. When things get tough, it’s likely she’ll return to her intellectual and psychological roots, and the government will act the way it usually has.

So I wouldn’t plan my life around meaningful liberalization in Brazil. Or good times in any of its markets. One reason is that the commodity boom has already run a long way, and further gains are likely to be marginal in real terms. But a bigger reason is simply the country’s history and culture - dictators, generals, chronic inflation, and consistently destructive economic policies. When the world economy turns down in the near future, it’s not going to help Brazil. They’ll likely revert to form. Or simply act like almost every other government in the world today and “do something.” Brazil is a prime example of the wisdom of the old saw “Never invest in a country that has the color green in its flag.”

Culture and Currency

Four recently published books promote Brazil as the place to be, mainly because it’s a BRIC that has established a great “track record” since 2001. This is typical of what happens at the top of a bubble. When stocks are at a peak, people want a book about how the Dow is going to 40,000; this is true across all times, places, and markets. People are now writing books on Brazil.

But it’s almost always a mistake to buy popular investments and speculations. In order to make serious money, you have to buy while something is cheap and unwanted, even unknown - better yet, despised. Not after it’s expensive and everyone’s hungry for it. People tend to confuse investments with people. When it comes to people, track records are critical. With people, past performance isn’t just the best, it’s essentially the only predictor of future performance.

Someone who has exemplified the Boy Scout virtues in the past is likely to continue on that course; someone with a panoply of vices and bad habits is likely to carry them to a bad end. The same is true of companies, at least until management changes. But even when it does, corporate culture lingers for a considerable period. This is even more the case with countries. Change in a country’s culture takes generations, if it happens at all.

Everyone talks (quite correctly) about how totally irresponsible Argentina has been with its currency, but Brazil’s follies have been forgotten in the celebrating of its success over the last 15 years. You may find a comparison of interest.

Argentina has had only five currencies in its modern history - the peso moneda nacional (PMN), the peso ley, the peso argentino, the austral, and the current peso convertible. The PMN was used from before WWI until 1970. In its early days, it was tied to gold, and the PMN traded at about 2.25 pesos to the dollar. It started slipping after the Great Depression began in 1929 and then went from 4.2 (to the dollar) in 1947 to 15 in 1950. At that point Peronism, a peculiar blend of corporatism, populism, socialism, fascism, Keynesianism, militarism, nationalism, and other variants of statism that seemed like good ideas at various times, took over. And the ideas have never let go of the popular Argentine psyche.

In 1970, the PMN was replaced by the peso ley, for a 100-1 rollback.
In 1983, the peso ley was replaced by the peso argentino, for a 10,000-1 rollback.
In 1985, the peso argentino was replaced by the austral, for a 1,000-1 rollback.
In 1992, the austral was replaced by the peso convertible, for a 10,000-1 rollback.

This happened with the election of Carlos Menem, who greatly liberalized the economy (while facilitating grand larceny among his cronies). Menem maintained this peso’s relative value with a currency board, wherein the central bank was supposed to take in and hold one U.S. dollar for every peso it issued. They kept to that for a while, then started fraudulently issuing extra pesos, which led to the famous crisis of 2001, with a 75% devaluation.

If you’d held Argentine currency through its various replacements over the last 100 years, you’d have retained only 1/70 trillionth of its original value. At the moment, the peso has an “official” value of 4.7 to the dollar, but trades on the semi-illegal free market for 7 to 1. It’s on its way to zero again. The history of currency in Brazil is even worse, despite the Banco do Brasil mission statement’s talk of “ensur[ing] the stability of the currency’s purchasing power and a solid and efficient financial system.” But all central banks say that.

Brazil long maintained its original real from the 18th century and then replaced it with the cruzeiro in 1942, for a 100-1 rollback.
In 1965, the cruzeiro novo replaced the cruzeiro, for a 1,000-1 rollback.
In 1986, the cruzeiro novo was replaced with the cruzado, for a 1,000-1 rollback.
In 1993, the cruzado was replaced with the cruzeiro real, for a 1,000-1 rollback.
In 1994, the cruzeiro real was replaced with the real, for a 2,750-1 rollback.

Since then, the real has lost about two thirds of its value relative to the dollar. I see no reason why it shouldn’t meet the fate of its predecessors. I calculate destruction against the dollar so far at about a quadrillion to one. But numbers of this order of magnitude are academic. I fully expect that, when the pressure for revenue and economic stimulus next arises, the Brazilians will once again destroy their currency.

The Bottom Line

My view is that in today’s world, it’s extremely hard and risky to invest. You must remember the correct definition of investing: to allocate capital to produce new wealth. Essentially that amounts to buying equipment, hiring people, renting real estate, and seeing that a business is run sensibly over the long term.

Investing is all about funding successful businesses. In order for that to be possible, you need some predictability and a certain amount of stability. Unfortunately, those are ingredients that go into short supply whenever government gets involved in the economy. And today, from what are already the highest levels in modern history, governments all over the world are becoming much more virulent. And since most of them are now manifestly bankrupt but are burdened by huge promises for welfare and transfer payments to the masses who voted them in, you can expect things to get even worse.

When there are no opportunities for investing, you can only speculate, which means, look for politically caused bubbles, collapses, and distortions. Brazil should only be viewed as a speculation. As chronically and pathetically mismanaged as Brazil has always been and continues to be, it’s astonishing how well it’s done. And there’s no reason that it shouldn’t continue progressing, despite the weight of government and its seeming inability to learn from its mistakes. People will keep producing, and technology evolving.

Am I negative on Brazil? No. I highly recommend you visit, especially before FIFA in 2014. I really like the country (notwithstanding São Paulo). But it’s not a sure ticket to wealth. In fact, over the next decade, I’d recommend you stay away from Brazilian markets. But armed with this information, hopefully we’ll recognize the Bovespa’s next bottom.
Doug Casey: Hmm...maybe the bottom is close now. Or certainly closer.

Editor’s Note: Doug Casey has been warning of a currency collapse. He believes a collapse of major currencies could wipe out trillions of dollars in wealth, including pensions. Here’s Doug:
It’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009…The U.S. created trillions of dollars to fight the financial crisis of 2008 and 2009. Most of those dollars are still sitting in the banking system and aren’t in the economy. Some have found their way into the stock markets and the bond markets, creating a stock bubble and a bond super-bubble. The higher stocks and bonds go, the harder they’re going to fall.

Unlike most people, Doug Casey has actually lived through a currency crisis. He was in Argentina when its currency collapsed in 2001 during the largest sovereign debt default ever. By making smart investments, he even managed to make a large gain on his money in the aftermath of the crisis.

We recently recorded a video presentation with Doug on this topic. In the video, Doug shares his advice on how to position your money and investments for the collapse of a major currency like the U.S. dollar. Click here to watch the video.

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