A lot of people are bullish Brazil. I think emerging markets should be part of a portfolio allocation, but like anything else, don’t overdo it. First, there are good signs Brazil is in a housing bubble. We learned the signs in the U.S., so it is not hard to spot it: That horrible part of town becomes “up and coming”, unexpected people making zillions as real-estate brokers, people feel “they have to buy something” otherwise they are “missing the boat”, prices seem obscene to everyone but people buy anyway. All this is happening there. Secondly, don’t expect Brazil to grow like China. China is now a totalitarian capitalist country. It may be now more capitalist than a United States under Obama, and it is certainly more capitalist than Brazil. Red tape in Brazil is 100% Kafkaesque. It has endless labor rules. These rules led to the creation of a labor court and labor court cases can go on for a decade or more (my wife, a naturalized American from Brazil, is in one court case for eight years to recover two months of pay from a going concern that just did not to pay her). Employment taxes in Brazil are also notoriously high. One consequence of these rules and taxes is that ~50% of the labor force is informal. They without a doubt hinder growth.

Last but not least, Brazil in October will chose a new president. The likely winner is Dilma Rousseff, a lady supported by Lula, the current president. Ms. Rousseff has a long rap sheet. When the military took over to avoid a Marxist revolution in the 1960’s, she–no George Washington but a Marxist revolutionary–grabbed guns to rob banks, cars and $2.5 million from a safe. Her small group killed two policemen and set off bombs. She has no executive experience in office. God knows how her presidency will work out. Lula’s presidency wasn’t as bad as people thought. He kept policies from the previous president (a moderate), which helped Brazil. But he made no reform to improve business conditions further and there is much room for improvement. A lot of outsourcing could be going to Brazil instead of China and India. Brazil isn’t far from the U.S. and is in the same time zone.


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