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Takeaway: Latin America is reminding US policymakers of the unpleasant direction in which they're steering the US economy.

SUMMARY BULLETS:

  • From excessive froth in Mexican capital markets to a serial CPI under-reporter (Argentina) calling out the US for being guilty of the same to Latin America’s resident socialist (Hugo Chavez) giving Obama a hyper-supportive thumbs up, recent occurrences and quotes from Latin American companies and policymakers have shed an unflattering light on the direction of US monetary and fiscal policy.
  • As it relates to specific investment ideas and themes across Latin America, we maintain our TAIL-duration bearish thesis on Argentinean peso-denominated assets as the continued popping of Bernanke’s Bubbles perpetuates both currency devaluation and sovereign default risk. Refer to the following two notes for more details: “ARGENTINA, IMPLODING” (APR 18) and “POPPING BERNANKE’S BUBBLES: READING THE WRITINGS ON THE WALL” (SEP 4).
  • Additionally, we maintain our bullish intermediate-term bias on Brazilian equities – though certainly on a short leash amid the backdrop of potential global economic contraction. Our view on Brazil is supported by our quant levels on the Bovespa, our country-specific economic models and our analysis of historic cycles (OCT ’08 bottom in the Bovespa Index). For more details here, refer to our SEP 25 note titled, “IDEA ALERT: BUYING BRAZILIAN EQUITIES (EWZ)”.

MEXICO REMINDS US HOW RIDICULOUS QE3 ACTUALLY IS

Mexican auto parts maker Sanluis Rassini SA in planning to market $250 million of B-rated 10yr bonds to international investors – just two years after the holding company in charge of the unit defaulted and 10yrs since its parent company stopped servicing its debt! While we are certainly not surprised to see the issuance pipeline filled with complete junk at/near all-time highs across a bevy of liquid asset markets globally, we would be surprised if this did not ultimately turn out to be yet another signal of the Topping Process underway across international capital markets.

Pause for a second and read the following sentence slowly: A company that has defaulted twice in the last 10yrs is marketing a quarter-billion dollars of 10yr, B-rated debt to yield-starved international investors – at/near the top of the global economic cycle.

We maintain that the academically-partisan Policies To Inflate out of the Fed, ECB and BOJ continue to fuel a broad-based mispricing of credit risk across international capital markets – a phenomenon that is directly born out of the Dare To Chase Yield and perpetuated via gross capital misallocation and malinvestments. From our purview, this is precisely why global economic growth and the domestic labor market continues to remain sluggish, as both continue to reel from allowing bad actors and bad investments to remain liquid.

Moreover, we believe that recessions and cyclical growth slowdowns are healthy insomuch that they promote an effective transition away from outdated growth strategies that no longer work. It’s highly unlikely that the global economy will ever be able to achieve any semblance of sufficient and sustainable economic growth if policymakers continue to incessantly manage their own career risk by attempting to reflate asset price bubbles, rather than promoting new organic growth opportunities. Refer to our AUG 10 note titled, “THINKING OUT LOUD RE: GLOBAL GROWTH” for more of our thoughts on this topic. But don’t just take our word for it; the Dallas Fed agrees wholeheartedly: http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf.

FERNANDEZ BLOWS THE WHISTLE ON THE US GOVERNMENT

In a response to IMF managing director Christine Lagarde’s plan to censure the Argentine economy (i.e. blacklisted from the bailout bonus pool) for not allowing the Washington D.C.-based organization to conduct its Article IV consultation of the country’s official economic statistics, Argentine President Cristina Fernandez recently said she would not accept any threats from the institution and followed up by saying:

What were the statistics of Portugal, of England, of this country? Do you really believe them? Do you really believe the cost of living in the United States is rising just 2 percent?”

–Cristina Fernandez at Georgetown University in Washington D.C.

For a bit of background here, this is the embodiment of the pot calling the kettle black, as Argentina has been serially underreporting CPI since her late husband Nestor cleaned house at the country’s national statistics agency INDEC back in 2007. Last year, the government fined more than a dozen researchers as much as 500,000 pesos ($106,000) each for reporting inflation rates that were in the range of 10-15 percentage points higher than official rates – which are already elevated to begin with (+10% YoY in AUG). By artificially suppressing the reporting of inflation, the Fernandez’s have been able to A) record higher rates of real GDP growth than otherwise possible and B) limit interest payments on inflation-protected debt securities, which, at $37.6 billion outstanding, account for ~21% of Argentine sovereign debt. It’s worth noting that the securities are down -13.7% in the YTD.

AMUSING MUSINGS FROM LATIN AMERICA - 1

In calling out the US, which continues to pursue a brand of ultra-easy monetary policy not seen domestically since the 1970s, Fernandez shed light on what policymakers like former presidential hopeful Ron Paul have alluded to in recent years: US CPI is also being systematically underreported, likely to help the powers that be achieve the aforementioned goals Argentina is pursuing, as well as to hold down the pace cost-of-living (COLA) adjustments to government benefits. But don’t just take our word for it; shadowstats.com, an increasingly respected research provider and scrutinizer of faulty US government statistics, agrees wholeheartedly:

AMUSING MUSINGS FROM LATIN AMERICA - Shadowstats CPI

But maybe we’re just a bunch of grumpy conspiracy-theorists-turned-macro-analysts. Perhaps there’s a chance that Obama isn’t having Bernanke debauch the USD in pursuit of his politicized goal to promote US manufacturing and exports (GM bailout?), all the while having the BLS report that there’s little-to-no inflation to speak of. Perhaps the bond market has it completely wrong by pricing the 10yr breakeven at 2.46%, which is a mere 20-25bps shy of all-time highs. Markets do tend to get things wrong from time-to-time; the S&P 500 peaked in OCT ’07 – just months ahead of the largest financial crisis and economic recession since the Great Depression!

CHAVEZ ENDORSES OBAMA; SAYS OBAMA WOULD DO THE SAME FOR HIM

Just in time for the Venezuelan presidential election (OCT 7) and the US presidential election (NOV 6), current Venezuelan president and presidential hopeful Hugo Chavez just dropped what may be the defining quote of the Obama presidency:

“If I was American, I would vote for Obama. And I think if Obama had been born in a Caracas slum, he would be voting for Chavez. I’m sure of it.”

–Hugo Chavez

It’s only fitting that North America’s most-socialist head of state is getting the official back-slap from South America’s resident socialist – especially given that both the Bush and Obama administrations have incessantly sought to make the US more like Venezuela over the last 12 years (i.e. perpetuating stock market inflation via currency devaluation and big government spending initiatives).

AMUSING MUSINGS FROM LATIN AMERICA - 3

All told, the present-day Venezuelan economy – with its persistent 20-plus percent annual CPI readings and university graduates working as mere street vendors – may be a startling glimpse into the US’s future if we continue down the path of Big Government Intervention in the US economy and global financial markets.

AMUSING MUSINGS FROM LATIN AMERICA - Obama Chavez

Enough said; enjoy the rest of your respective afternoons.

Darius Dale

Senior Analyst