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Conclusion: Our proprietary Global Macro research process continues to point to more Stagflation in Brazil.


Position: Bearish on Brazilian equities for the intermediate-term TREND; Bearish on Brazilian real-denominated debt for the intermediate-term TREND.

“Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”

-Brazilian President Dilma Rousseff, May 1, 2011

Judging by the quote above, one would expect Brazilian policymakers to be more proactive in combating inflation, rather than reactively waiting and watching for more surprises to the upside. Alas, we continue to see more “bark” than “bite” with regard to Brazil’s inflation-fighting efforts. For instance, just as Rousseff was uttering these vigilant words, it was reported that her administration intends to launch a new program to reduce extreme poverty. The initiative – which will initially expand upon Brazil’s Bolsa Familia program – will emphasize cash transfers, a general expansion of public services and Brazil’s social safety net, and specialized job training.

It appears that as Rousseff & Co. lean hawkish with their political rhetoric, their actions tell an entirely different tale of dovishness, populism, and fiscal laxity. While we certainly applaud the overwhelming success of Bolsa Familia in delivering millions of Brazilians from the clutches of poverty, we do question the timing of the decision to expand upon it here and now – particularly with regard to inflation, which is running at a 28-month high on an official basis. Simply put, the last thing the Brazilian economy needs at this juncture is increased government spending for socialist projects.

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In an earlier report titled: “Brazil: One Step Forward; Three Steps Back”, we’ve shown that Rouseff’s R$50B in proposed spending cuts for this fiscal year are little more than smoke and  mirrors when analyzed with a careful lens (email us if you’d like a copy of the report). Importantly, it means that the increase in government spending via this latest initiative is not likely to be funded with savings from other areas of the budget. As we outlined in a recent post titled: “Oh, Brazil…”, Rousseff is likely to miss her central government budget target of a primary surplus of R$117.9B reis and initiatives like the one introduced this weekend certainly do not help her cause.

Be it Greece in March or the US in January, it’s important to remember that sovereigns can and do miss numbers. Net-net, we remain bearish on Brazilian real-denominated debt over the intermediate-term TREND as Brazil’s deficit and debt burden is likely to surprise to the upside alongside Brazilian inflation in the coming quarters.

Shifting gears, we remain bearish on the slope of Brazilian growth through 2Q11 and on a full year basis, we think Real GDP could surprise to the downside of consensus expectations of +4.05% YoY – expectations that have dropped like a rock in recent weeks as the sell-side once again proves how useless after-the-fact estimate revisions are. Economists now find conviction in their bearish forecasts on recent weak economic data – something we contend they should have saw coming in early November. 

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In the meantime where risk is managed on a proactive basis, we’ll stick to our process which continues to point to the conclusion that Growth Slows as Inflation Accelerates in Brazil. As inflation ramps up in the coming months, we expect Brazil’s consumption growth to deflate, Brazil’s GDP Deflator to inflate, and the central bank to resume hiking interest rates in an aggressive manner. These primary factors continue to have us bearish on Brazil’s equity market and we will look to short Brazilian equities on strength up to the Bovepa’s TREND line of resistance of 68,333.

Darius Dale


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