Think BRAC not BRIC!

We’re seeing our reflation theme heating up in Brazil, Russia, Australia, China (BRAC anyone?) as our global Macro factors line up with our US Dollar call, “breaking the buck”.

Our thesis on the USD is concise—if the Obama administration can devalue the dollar, global equities can break out to the upside and commodities can reflate from their bombed out lows. Commodity reflation will benefit commodity-rich BRAC countries, especially with geographic proximity to China to feeds its internal growth.

We’re already seeing confirmation this week that the buck is breaking. Over the last three days the USD is down -2.1%, the SP500 is up +10.7%, and commodities have received a material lift: oil had a huge move yesterday up +10.56% (etf USO closed at +7.34%) and copper has shot up 8.1% month-to-date, closing up 2.33% yesterday.

The Macro team has been stressing the importance of President Obama shaking hands with the client—China. After Geithner’s blunders in addressing the Client’s stance on its currency, it’s now clear that China wears the pants and therefore will set the Yuan at whatever level it sees fit versus the basket of major currencies.

In today’s Early Look, Howard Penney furthered this point, noting that the number one story on Bloomberg today says that the Premier of China, Wen Jiabao, is “worried” about China’s holding of US Treasuries and wants assurance that the investment is safe. Our assessment is that Wen Jiabao wants the USD to weaken to inflate assets domestically, which will make USD denominated debt more attractive to foreigners. Logical, non? If investors return to US Treasuries, bonds will rise and reverse the current uptick in yields.

If we return to Brazil, Russia, Australia, and China, these commodity-driven economies have the Macro set-up to benefit from US assets inflating for these countries will benefit on commodity reflation; and especially Australia and Russia with proximity to China can benefit in feeding the country the raw materials it needs for internal growth. On aggregate, this set-up on an intermediate Trend perspective (3+ months) will encourage global reflation. We’re getting incrementally bullish! But don’t be that guy/gal buying high and selling low. We have had a big run-up in prices here and suggest you wait patiently, for your entry point – that’s if you’re not already there!

Look for us to use the following ETF plays: Brazil (EWZ); Russia (RSX); Australia (EWA); and China (CAF).

Matthew Hedrick
Analyst

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