Once again we approach a disappointing year’s end for Brazil. Unfortunately, our predictions for 2015 have come true: the crisis has worsened, corruption is everywhere, the Dollar is high against the Brazilian Real, inflation is on the rise, GDP is plunging and interest rates have been raised several times this year.

Of course, our traditional bet remains for 2016: all the economist and analysts are going to miss their predictions for next year. We never miss that one! At the beginning of the year, the so called experts forecasted a GDP growth of 0.5% (exactly, growth), the Dollar at 2.80 BRL (!!!), Industrial Production growth of 1% and inflation at 6.6%. We come close to the end of the year with a 3.7% contraction in the GDP (for now), Dollar at 4 BRL, Industrial Production falling 7.7% and inflation as high as 11% a year. Not bad!

We mentioned in last year’s report that we doubted that there would be an interest rates hike in the USA.
We were sensible enough to change our mind 6 weeks prior to the first rate hike in nearly 10 years. We sent a report to our clients warning them about our position, which once more has proved to be correct.

In spite of the recent rate hike (and of the few that are to come), we do not believe the US will keep it for very long.
It is the first time in history that the FED has raised rates amid worsening economic data. That is the worst timing for lifting rates, but the FED had to do it, otherwise it would lose its already diminished credibility.

Therefore we expect a few more rates hikes throughout the coming year, but nothing relevant. And as we said in last year’s report, it is possible (and probable) to have the return of Quantitative Easing (QE) and a reversion of December’s liftoff.

We still cannot see improvements in the American economy. What we see is a rise in asset prices, and we believe we are getting closer to an inflection point in the price of such assets. As a matter of fact, we do not believe in four more rates hikes, as priced by the market. If the FED keeps tightening, it may cause the burst of the bubble it created, ruining the so-called “wealth effect” it aimed to build. We are not advocating for lower rates or more QE, actually we favour higher rates and less government interference. But unfortunately, the Keynesian FED members appear to think otherwise.

We would like to point out two risks we believe very few are taking into account: the risk of a recession in the American economy and the risk of an expansion of the stimulus programs, way more because hardly anyone believes the US are in crisis. It is worth noticing that at the end of 2007 and beginning of 2008 the US was already in a recession, but the FED hadn´t recognised it at that point. It took the bursting of the bubble for the FED to admit it. We think that is the case now.

In fact, when we use the real inflation indexes (calculated by ShadowStats), we can see that the USA is in recession and the economy is growing at a slower pace than the inflation. That would explain many of the figures we are currently seeing: low-wage jobs being created and high qualified jobs being destroyed (especially in the energy sector, as a result of plummeting oil prices). According to ShadowStats, the unemployment rate in the USA has exceeded the 20% mark for a while now. It is hilarious to see economists saying the unemployment rate in Spain is 25%, whereas they claim it to be much lower here in Brazil and in many other countries.  If truth be told, the difference is solely in the fact that Spain calculates it more honestly.

As soon as the world figures out the actual situation of the American economy and realizes there is no recovery taking place – all we will see is the rise in asset prices, thanks to FED stimulus programs (QE1, QE2, QE3 and Operation Twist) – and that the American Central Bank has no idea of what is going on and that it may go back to printing even more money, we will see the depreciation of the American Dollar (perhaps not against the Brazilian Real, but certainly against a Currency Basket, including gold). Such a scenario would have important effects over the economy of the entire world, which we assume are not being considered. Obviously, it might take time for this to happen, so it isn´t a bet we are willing to take now, especially with the amount of short covering in the Dollar. It might get stronger, before getting weaker.

Throughout this year we have seen the Central Banks of Europe, China and Japan introducing more stimulus programs and obtaining the very same results: appreciation of assets, devaluation of their currencies and reduction of the purchasing power of their population. According to Einstein, the definition of an insane person is someone who does the same thing over and over and expects different results. Taking this definition, we could assert that the world´s Central Banks are all insane!

What used to be unconceivable a few years ago has now become true: NIRP (Negative Interest Rate Policy) is now a reality in many European countries. There have been cases, where banks lend individuals money to buy real estate and “pay” them interest on the money they lent. Indeed, we could not have come up with such a thing!

The European countries have to deal with very serious internal problems, which are becoming worse, as a consequence of the massive immigration of refugees. This story is not going to have a happy ending, as we saw in Paris a few weeks ago.

In China, there is a growing risk of a housing bubble and that may be the greatest risk to the global economy. For years, we have been saying that the Chinese economic growth is, at best, around 3%, whereas all the banks and analysts insist it is about 7%. Right before Christmas, the news agency Xinhua reported that the real GDP growth is between 1 and 2% and that the old figures had been literally made up.

As Li Keqiang, then China’s Vice Premier, admitted in 2007, we should not rely on Chinese economic data, except for electricity consumption, rail cargo volume and loan growth. Those figures, by the way, indicate a significant deceleration of the growth rate.

Furthermore, we have seen the oil prices plunge, along with iron ore and other commodities. When China’s economy was smaller and growing at a similar rate, the commodity prices actually surged. So, how would it be possible for the Chinese economy (much bigger now) to grow at the same rate and yet have a negative impact on the imported commodities? 7% growth rate is just not possible!!!

It took the government several interest rates cuts, reduction of the reserve requirements, arresting of a few short sellers (and sellers too) and devaluations in order to recover the Chinese Stock Market from this year’s crash. Without those interferences, the indexes would end the year with considerable losses.

The Japanese Stock Market also went up this year, thanks to the stimuli given to the national economy.
It is incredible that people keep making the same mistakes and still expect different results! Japan has been going through a gloomy period of very low economic growth for decades now and no stimulus has managed to change that. What they all need is higher interest rates, fiscal austerity and more freedom.

Throughout the entire world, central banks have been printing money and artificially lowering interest rates (some are already in negative territory) in the hope of supporting economic growth. What they are actually going to achieve is an unprecedented high inflation, currency devaluation and diminished purchasing power of the population.

We like gold as a real asset that protects investors against the insanities of Central Banks. We believe everyone should have a small exposure to the metal. This year gold has had a spectacular performance and has already risen 35% in BRL and many other currencies, with the exception of the US Dollar.

As we predicted last year, 2015 was a very tough one. This prediction did not let us down.

For 2016, we suggest a greater fixed income allocation. Some securities are currently yielding over 18% per annum and inflation-linked ones are also very attractive at the moment. There are very few alternatives as interesting as fixed income, when the nominal interest rate is as high as 14.25% a year.

Now is not the appropriate time to take risks, on the contrary, it is time to preserve wealth. We did that efficiently in 2015 and the funds under our management have beaten their benchmarks, with portfolios yielding over 130% of the CDI (Fixed Income Benchmark), Hedge Funds exceeding 120% of the CDI and Equity funds performing much better than the Ibovespa (Stock Exchange Index).

Our unique market view and international experience enable us to manage portfolios with the best risk-return relationship.

We would like to take the opportunity to thank everyone for your trust this year and to say that we are looking forward to working together in 2016.
May you have an excellent New Year, good health, peace and success.


    Raymond Smith
    30 de December de 2015

    The opening paragraphs of this report reflect a typically Brazilian attitude of doom resulting arising from the current phase of this county's development. I, like many long time foreigners in Brazil see exactly the opposite. It is a time of rejoicing! Finally, many malignant mutations in Brazil's DNA are coming to the surface and public opinion is forcing the national political structure to swallow some nasty medicine. Undoubtedly this treatment will have some undesired side effects but, given time (and this is a question of decades not years), this country will benefit from the current changes in public attitude taking place, principally from the average voter understanding that utopia does not exist and that a pragmatic politician is better than a superficially idealistic one. Brazil has a very bright future and the lessons being learned now will only make that future brighter. We must just be patient and let the fever burn out, the immunities created will stand us well in the long term.

      Marcelo Lopez
      30 de December de 2015

      Dear Raymond,
      Many thanks for your comments. Always appreciated.
      I hope I am wrong about my assessment of the Brazilian economy, but Brazil proves every optimistic person wrong time and time again...
      Kind regards,

      4 de January de 2016

      This is a bit of the 'glass half-full or half-empty' discusssion.
      While it might be half-full in the very long-term (decades, as you put it, and that's still a maybe), it's definitely empty in the short- and medium-term. Among larger economies only Russia fares as badly as Brazil right now in macro terms, and they have more to fall back on than Brazil does.


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