Brazil, Unrest, Socialism, and Markets

The Brazilian Miracle has died.

The Milagre econômico, milagre econômico brasileiro or Brazilian miracle is a name given to a time of exceptional economic growth during the military regime in Brazil, the “anos de chumbo”. Although there is no universally-accepted definition of this period, it is generally regarded to have taken place mainly during Brazilian President Emílio Garrastazu Médici’s tenure, from 1969 to 1973. This perception of a so-called ‘golden age’ of Brazilian development, associated to an increase of wealth concentration and economic growth was strengthened by the conquest of Brazil’s third world football championship at the 1970 FIFA World Cup, among other sports triumphs and the official adoption of the “Brasil, ame-o ou deixe-o” (“Brazil, love it or leave it”) motto by the Brazilian government.

The Wiki, as usual, puts a left spin on that description. For one thing, The Miracle continued, after a gap, in the ’90s and ’00s ( “oughties” ) as various democratic governments continued to follow pro-growth market based economics. Yes, many folks call that chunk the Second Miracle. As it was based on much the same non-Socialism, I would choose to explain the ‘dip’ in the middle as the anomaly in one longer trend. One leader of that era even proclaiming himself very much a Socialist, but stating that he would NOT interfere with the miracle happening due to free markets.

They also get in the ‘so called’ jab and just MUST point at “wealth concentration” while ignoring the rampant gains made across the country in jobs, income gains, and generally a wonderful economic result.

I made a bundle of money off of mostly just “buy and hold” of EWZ the Brazil fund.

Then they elected a Socialist who said, roughly, ‘enough of this hands off the economy crap’ and Brazil has been accelerating into the dumpster ever since. You would think folks could catch a clue about this, but even when beaten with the Clue Stick of a wonderful economy they just can’t seem to let go of their Class Envy and Greed.

(Sidebar note to Serioso: Please note that I’m quoting the NYT. Though, yes, from back when it was a more important part of the world of communications.)

Note this article is from 1983. Just post the first “miracle” and as the Brazilians tried One More Time a bite at the Socialism Poison Apple, and just before they went back to a market basis and took off again:


By PETER T. KILBORN, Special to the New York Times
Published: November 26, 1983

RIO DE JANEIRO— Brazil is the country that might have become another Japan. Instead, it is flat broke, with a broken spirit and an empty treasury.

The Brazilian ”miracle” – the spurt of growth from the late 1960’s to the late 1970’s – became the economist’s model of the way to manage expansion from agrarian stagnation to the newly industrialized stage.

Now, however, Brazil is in its third year of recession, and the country that once was the world banking system’s ideal borrower pleads for loans just to pay the interest on its debts.

How Brazil fell to a position where it is known best today for the weight of its $92 billion foreign debt, larger than that of any other country, is a matter that absorbs all those who have a stake in the country – Brazilians themselves and the industrial world, which relies for much of its own prosperity on the health of developing countries such as Brazil.

Gee, how ‘quaint’ it looks to see national debt measured in mere Billions…

Leading Brazilians both inside and outside the Government cite the effects of the sharp rise in oil prices during the 1970’s on an economy that had been building its future on imported oil. They blame Western banks for heaping an insupportable burden of loans on the country. And they blame the United States for incurring budget deficits of $200 billion a year that have forced up world interest rates and hence affected the ability of Brazil to make interest payments.

Ultimately, however, they blame Brazil’s technocrats, the people who took the bankers’ money.

The technocrats were the planners, economists, engineers and technicians whom the military dictatorship, itself reluctant to govern, appointed to run the economy after the generals seized power in 1964. The technocrats are elected by no one, and in time they became accountable to no one, their critics say.

”They became the owners of the truth,” said the head of one of Brazil’s biggest industrial companies, a man who depends on Government contracts for much of his business and therefore asked not to be named. ”They believed too much in themselves.”

After a slam at “The Bankers” for having been so imprudent as to loan them the money, eventually they get closer to the truth. You can see a curious parallel to this in the EU today with “unelected” insiders running things and countries taking on too much debt.

”There’s a drought in the northeast, and there’s flooding in the south,” one current joke goes, ”so the technocrats decided that, on average, everything is fine.”

The technocrats are largely faceless to most Brazilians. They number in the thousands and proliferate in the second and third levels of government, especially in such ministries as finance, agriculture, mining and industry. Many come from the universities.

And people complain at me when I describe some things as “over averaged”…

Further down, it shows another common failing. This is after the Arab Oil Embargo shocks when the world hit a recessionary bump.:

”There were three options then,” said Roberto Campos, former Ambassador to the United States and Britain and a member of the Government’s Social Democratic Party in the Brazilian Senate.

Brazil might have merely accepted a recession, as the industrial countries did, he said. It might have accepted a reduction of growth, as did developing Asian countries, among them Taiwan and South Korea. ”This was the prudent option,” Mr. Campos commented. Instead, he said, Brazil, like Mexico and Venezuela, sought to suppress imports and attempted, less aggressively, to promote exports.

‘Should Have Reversed Gears’

”Brazil,” he added, ”financed its adjustment rather than adjusted. This was not irrational at the time. You could still get good interest rates. Our mistake was in adhering to that option when it became apparent that it was incorrect. We should have reversed gears.”

Accept a recession? Never (at least, not to the “Social Democrats”… Slow down growth? Why, hard to accept when you have been living beyond your means and depending on that growth to bail you out of over borrowing. So the answer? Borrow more…

Watch for this same dilemma to hit China. Going from spectacular growth to more realistic growth ( 12% down to 6% or so ) has caused all sorts of grief. The answer? So far it is to print money and blow it into the stock and real estate bubbles as they attempt to equalize with reality. We’ll see how that works out…

This wiki covers the timing of things well, if not the actual root causes.

Stagnation, 1962-67

As a result of the problems associated with import substitution industrialization and the reforms introduced by the military regime after March 1964, the Brazilian economy lost much of its dynamism between 1962 and 1967. The average rate of growth of GDP in the period declined to 4.0 percent and that of industry to 3.9 percent. In part, stagnation resulted from distortions caused by the strategy. Moreover, political troubles negatively affected expectations fac and precluded the formation of a coalition to back the introduction of tough measures to control inflation and the balance of payments crisis. Political troubles also hindered the removal of obstacles to growth.

Note that going from 4.0% to 3.9% is called “lost much of its dynamism”… We’d be party in the streets if Obama could claim 3.9% economic growth… but this was under the Military, so not the good kind of growth, one surmises…

The 1964 coup dealt with the political obstacles by forcefully restraining opposition to the military agenda of change. With the objective of transforming Brazil into a modern capitalist economy and a military power, the regime implemented a series of reforms aimed at reducing inflation, at removing some of the distortions of import substitution industrialization, and at modernizing capital markets. The regime gradually introduced incentives to direct investment, domestic and foreign, and tackled balance of payments problems by reforming and simplifying the foreign-exchange system. In addition, the regime introduced a mechanism of periodic devaluations of the cruzeiro, taking into account inflation. Finally, the military government adopted measures to attract foreign capital and to promote exports. It took steps to expand public investment to improve the country’s infrastructure and later to develop state-owned basic industries.

Spectacular growth, 1968-73

So a nice little swap over to market driven forces, and “Spectacular Growth”… Though I do cringe at the “State owned basic industries”, but the first derivative was in the right direction, toward markets and investment.

Spectacular growth, 1968-73

The post-1964 reforms and other policies of the military government, together with the state of the world economy, created conditions for very rapid growth between 1968 and 1973. In that period, the average annual rate of growth of GDP jumped to 11.1%, led by industry with a 13.1% average. Within industry, the leading sectors were consumer durables, transportation equipment, and basic industries, such as steel, cement, and electricity generation.

As a result of the post-1964 policies, external trade expanded substantially faster than the economy as a whole. There was a significant growth in exports, especially manufactured goods, but also commodities. Yet, imports grew considerably faster, rapidly increasing the trade deficit. This did not present a problem, however, because massive inflows of capital resulted in balance of payments surpluses.

That, then, followed by the Oil Shock, technocrats trying more command driven economics, loads of debt, and that ‘bad times’ noted above. What gets them out of it? After fooling around and having nearly hyperinflation in the ’80s, things changed:

The president appointed a determined minister of finance, Fernando Henrique Cardoso, and a high-level team was put in place to develop a new stabilization plan. Implemented early in 1994, the plan met little public resistance because it was discussed widely and it avoided price freezes.

The stabilization program, called Plano Real had three stages: the introduction of an equilibrium budget mandated by the National Congress a process of general indexation (prices, wages, taxes, contracts, and financial assets); and the introduction of a new currency, the Brazilian real, pegged to the dollar. The legally enforced balanced budget would remove expectations regarding inflationary behavior by the public sector. By allowing a realignment of relative prices, general indexation would pave the way for monetary reform. Once this realignment was achieved, the new currency would be introduced, accompanied by appropriate policies (especially the control of expenditures through high interest rates and the liberalization of trade to increase competition and thus prevent speculative behavior).

By the end of the first quarter of 1994, the second stage of the stabilization plan was being implemented. Economists of different schools of thought considered the plan sound and technically consistent.

Got that? Balance the budget, by force if necessary. STABLE currency (don’t borrow up the wazoo and print currency…). Policies that control expenditures.

And the economy did well. The EWZ made me a bundle then. They even elected a Socialist, but one who said he would not screw it up by messing with the economic rules.

The economy grew 4.4% in 2000, but problems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, leftist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. Poverty was down to near 16%.

In 2002, Luis Inácio Lula da Silva won the presidential elections and was re-elected in 2006. During his government, the economy began to grow more rapidly. In 2004 Brazil saw a promising growth of 5.7% in GDP, following 2005 with a 3.2% growth, 2006 with a 4.0%, 2007 with a 6.1% and 2008 with a 5.1% growth. Due the 2008-2010 world financial crisis, Brazil’s economy was expected to slow down in 2009 between a decline of -0.5% and a growth of 0.0%. In reality, economic growth has continued at a high rate with economic growth hitting 7.5% in 2010.

Then they elected a Real Socialist who said ‘the heck with that’… and things went under.

The wiki, of course, is silent on that point. Not even much of a hand-wave to cover it. Just things were great until they weren’t (even after continuing just fine through the ‘financial crisis’…)

2010s economic contraction

Following a boom at the end of the previous decade, Brazil’s economy experienced a contraction. Between 2011 and 2015, the value of the Real fell from 1.55 Reals per US dollar to 2.8 Reals. The price of many of the country’s main exports fell due to falling demand. From September 2014 to February 2015, the largest energy corporation, Petrobras, lost 60% of its market value. Unemployment remained below 6% but began to rise above that in 2015 with the economy overall expected to contract by 25% in 2015 in US dollar terms.

Petrobras, sitting on some of the biggest oil deposits in the world, during times of $100+ oil, lost value… ( I had owned it up until the probable election outcome was clear, and dumped any remaining near the top.)

I find this a fascinating chart. I was very much owning EWZ through that parabolic rise segment. Some trades in and out, but mostly in. It was one of my big favorite vehicles then. During the crash, I was largely out of it (one of the benefits of a hard rule to sell when SMA rolls over and DMI is red on top and MACD is red on top and especially when it goes under the zero line… it keeps you out of crashes.) I bought back in a little on the rise back out, but sold out entirely once the Socialist For Real candidate was being favored. You can see how after a rebound bounce, it just dribbles down toward gone…

Always be on the lookout for that parabolic rise profile. While it can continue far longer than you would expect, it WILL end in a plunge… So ride it until the end, but the closer to vertical things get, the tighter your stop loss order.

EWZ all data 20 Aug 2015

EWZ all data 20 Aug 2015

This is a weekly tick mark chart, and I think you can see how useful DMI is at this time scale. Steady “blue on top” sets the bias to “just be in” and at most use put options to insure against small ‘corrections’ on the rise. During the ‘dribble down’ it is mostly red on top and clearly shows “just be out or be short”. The repeating ‘blue bubbles’ showing when to have a closed short, from a stop loss, re-establish as things return to the trend line. This technique will be of increasing value in the coming months (years?) as China has a similar “issue” (but hopefully handles it better) and potentially in the USA if The Socialists (either Bernie Sanders who admits it or Madam Hillary who is, but knows to keep her mouth shut) get elected.

And that is part of my reason for being very unfond of Socialism. You can pretty much map a stock market and economic prosperity based on the first derivative of Socialism. If it is decreasing, a country improves (see China moving from Communism to more “democratic socialism”) and if it is increasing, a country hits the skids (a long list of examples, but in this case, Brazil a couple of times…)

That is also pretty much the only reason I pay any attention to what form of government any foreign country has. Because I need to know when to buy and hold their stock, and when to sell and maybe even short it. It is a great indicator… sadly.

Why bring this up now?

Brazil protests spread in Sao Paulo, Brasilia and Rio

18 June 2013
From the section Latin America & Caribbean

As many as 200,000 people have marched through the streets of Brazil’s biggest cities, as protests over rising public transport costs and the expense of staging the 2014 World Cup have spread.

The biggest demonstration was in Rio de Janeiro, where 100,000 people joined a mainly peaceful march.

In the capital, Brasilia, people breached security at the National Congress building and scaled its roof.

The protests are the largest seen in Brazil for more than 20 years.

Yeah, sure, that’s it, the World Cup… ;sarc>

How about Socialism ruining the economic miracle? How about Petrobras becoming a slush fund for political patronage?

“This is a communal cry saying: ‘We’re not satisfied!’,” Maria Claudia Cardoso told the Associated Press news agency.

“We don’t have good schools for our kids. Our hospitals are in awful shape. Corruption is rife. These protests will make history and wake our politicians up to the fact we’re not taking it anymore,” she said.

“We need better education, hospitals and security, not billions spent on the World Cup,” said one mother who attended the Sao Paulo march with her daughter.

“We’re a rich country with a lot of potential but the money doesn’t go to those who need it most,” 26-year-old photographer Manoela Chiabai told the Associated Press.

More Than a Million Hit Brazil Streets to Protest Rousseff
David Biller
March 15, 2015 — 8:57 AM PDT Updated on March 16, 2015 — 6:05 AM PDT

Demonstrators take to the streets to protest against the government of president Dilma Rousseff, in Rio de Janeiro, Brazil, on March 15, 2015. Photographer: Christophe Simon/AFP via Getty Images

Bloomberg) — Brazil’s government will present a package of anti-corruption measures after more than 1 million people, some of them calling for President Dilma Rousseff’s impeachment, took to the nation’s streets Sunday.
Rousseff will deliver the package within days, Secretary General Miguel Rossetto and Justice Minister Jose Eduardo Cardozo said to reporters in Brasilia after meeting with the president. Cardozo said the government is open to dialogue. He added that Brazil needs “political reform” including a ban on corporate finance of electoral campaigns.
Higher taxes and increased prices for government-regulated items like gasoline are rankling Brazilians as the biggest corruption scandal in the nation’s history ensnares elected and appointed officials. The approval rating of Rousseff’s government has plummeted since she won a close re-election last October. Yesterday’s protests were bigger than the June 2013 demonstrations in which more than a million people decried deficient public services and demanded an end to corruption..

Brazilians March in the Streets to Impeach President

Published by David Iaconangelo April 13, 2015 1:45 pm

The main reason is the scandal. Petrobras is owned mostly by the Brazilian state. It generates huge revenues for the country, and it’s in many ways a symbol of the state itself. And when Rousseff was at its head, serious abuses went on: large construction and engineering firms allegedly paid about $800 million in bribes and kickbacks in return for the rights to major projects.

But many of the protesters, returning to the streets for the second time this month, are calling for Dilma to leave office – and take her allies from the Workers’ Party with her. The PT has been in power for 12 years now. Although it retains a strong base of supporters, especially among the classes that benefited the most from its social programs, other Brazilians want to see a change in government. Especially because the economy has stagnated. As the New York Times notes, the Brazilian currency, the real, has taken a 23 percent loss this year against the dollar as investors pull out of the economy. Current inflation has been the highest in almost a decade, and the scandal has set off a wave of job losses in the oil industry.
Much hang on the fate of her government’s austerity measures. They amount to a reversal of course: as the Financial Times notes, her government had previously tried to stoke the coals of the economy through a program of fiscal spending, price controls and intervention in industry, which was designed to increase consumption. The strategy ended up scaring off foreign investment. Now, she’s done away with her old finance minister. She has brought in a new one whose slashing of spending plans has earned him the nickname of “Scissorhands”.

So once again a clear pattern. But at the end, even the hard core Central Authority socialist is resorting to “austerity” and cutting spending plans when the flow of “other peoples money” to spend runs out (that line about “scaring off foreign investors”… it isn’t an investment when it is spent on consumption…)

Gee… massive corruption, riots and marches in the streets, socialists limiting any profit potential, and spending way beyond their means. Can’t imagine why foreigners might not want to send their money down there to be spent… It must be because they are mean… /sarc>;

And the protests continue to now:

Anti-government protesters take to streets across Brazil
Originally published August 16, 2015 at 3:50 pm

The Associated Press

SAO PAULO (AP) — Brazilians took to the streets of cities and towns across the country Sunday for anti-government protests being watched as a barometer of discontent with the increasingly unpopular President Dilma Rousseff.

Called mostly by activist groups via social media, the demonstrations assailed Rousseff, whose standing in the polls has plunged amid a snowballing corruption scandal that has embroiled politicians from her Workers’ Party as well as a sputtering economy, a weakening currency and rising inflation.

But the protests drew relatively modest crowds, likely giving the president some breathing room. Huge numbers had come out for two earlier rounds of demonstrations this year.
The Datafolha polling firm estimated 135,000 people demonstrated against Rousseff on Sao Paulo’s Avenida Paulista, one of the city’s largest avenues, while state police put the number at 350,000. Crowd-counting experts have long criticized Brazilian police estimates, saying they overestimate crowds by relying on photos of only the most crowded areas to estimate a gathering. Datafolha breaks the avenue up into sections and gauges density for each section.
Amid the corruption probe and an economic crunch that has seen the once-booming economy teeter on the brink of recession, Rousseff’s popularity ratings have fallen to a level not seen since 1992, when President Fernando Collor de Mello was forced from office after being impeached for corruption.

A poll earlier this month said only 8 percent of those surveyed considered Brazil’s government to be “great” or “good.” By contrast, 71 percent said the government is a “failure.” The Datafolha poll was based on interviews with 3,358 people on Aug. 4 and 5 and had an error margin of plus or minus 2 percentage points.

Yet this movie is substantially the same one seen a few dozen times in recent history. Capitalism and markets create a booming economy and wealth is created. EVERYONE benefits as the entire economy does well. Folks get greedy and have class envy, so elect a Socialist to “redistribute” things, and the economy tanks.

Season liberally with the fact that Socialists just LOVE crony capitalism aka “Third Way” economics aka “Fascism – as practiced by the Socialist Mussolini”, and that ends up as corruption in State run enterprises and “investments” (Solindra anyone?…) and this is where you end up.

Where Greece has ended up. Were the USA will end up if things are not reversed (can you say $18 Trillion and rising fast?…)

One can only hope that “this time for sure” we can learn from the examples of others.

But I’m not holding my breath…

But for now, no money goes to any Brazilian investment (or any of the other Socialist States of Latin America… Venezuela, Ecuador, Bolivia, …). As China grapples with the slowdown of their “Economic Miracle” watch out for a creeping return of Socialism styles. As soon as the move is no longer toward market based economics, but starts to slide back into Central Authority control, run for the exits.

Did I mention massive intervention in the stock markets and financial markets in China recently?…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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4 Responses to Brazil, Unrest, Socialism, and Markets

  1. Sera says:

    Rather than reading deToqueville, they (China, Venzeuela, Brazil and others) should be reading Gustave le Bon.

    The power of conquerors and the strength of States is based on the popular
    imagination. It is more particularly by working upon this imagination that
    crowds are led. All great historical facts, the rise of Buddhism, of Christianity,
    of Islamism, the Reformation, the French Revolution, and, in our own time, the
    threatening invasion of Socialism are the direct or indirect consequences of
    strong impressions produced on the imagination of the crowd.

  2. Jason Calley says:

    Hey Sera, I just wanted to echo your suggestion of Le Bon. I suspect that he must have been a great influence on Edward Bernays. I am reminded of this clip from Men In Black:

    (Just as a sidenote in the interests of fringe science, Le Bon also wrote a book, “The Evolution of Matter” which dealt, in part, with the artificial creation of radioactivity in light elements. He claimed that a piece of zinc, rubbed with mercury, became radioactive after exposure to sunlight. this was pre-Geiger-counter, and the only easy way of measuring radioactivity at the time was through use of an electroscope; I have wondered whether perhaps his readings were influenced by mercury vapors bleeding of the charges. Regardless, I have no idea if his experiments have been reproduced with more modern equipment. Apparently all available copies of his book were vacuumed up by the FBI sometime shortly after WWII. Presumably accurate copies are available now online.)

  3. Sera says:

    Thanks Jason- I love reading the old stuff. Found it here, and will glance over it tonight…

    That was a great scene in MIB.

  4. E.M.Smith says:

    @Jason Calley:

    That clip is one of my favorites. I watch it every few months ;-) I took the liberty of pasting in the “embed” code along with the link, just so I can watch it over and over without leaving the page ;-)

    Per the zink and mercury: I’d suspect some kind of solar electric effect generating a charge field that drains the electroscope… There are many binary pairs that make a photoelectric junction…


    I guess given your endorsement and Jason’s “here here” I’ll have to make time to learn about Le Bon…

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