Brazil investors and Emerging Markets worldwide brace for increasing inflation
In the developing world, we have the opposite problem as we do in the so called "developed" world where the intelligentsia are busy worried about aggregate demand and deflation, Brazil, China and India all are worried about investment. We will have more on emerging market inflation coming up soon. To give you a tease we have provided a chart which explains that point.
|Inflation in developed and developing world. Source IMF|
Brazil seems to be headed the inflationary route as well. This is part of the Great Money Shift that we have highlighted on this post several times. I fear inflation, more than I fear deflation. Why?
We have already gone through a serious bout of inflation and we didn't even know it. Helicopter Ben injected huge amounts of money into the economy via ultra low interest rates, Quantitative Easing and Bailouts. Congress gave us stimulus spending and debt.
All of this is inflationary, however, money is fungible. My savings deposits in a bank in Nebraska can be invested in consumer loans in which case it will influence CPI inflation and we will see broadly rising prices in consumer goods in the US. However, that money can also be lent out to treasuries to create a vast bond bubble that we have now, or it can be lent out to Chinese or Brazilian consumers. How you might ask?
They could lend it out to commodity suppliers and it could wind up in a mine somewhere in Brazil or China where they use it to pay their workers. Or it could be placed into a broad based emerging market fund. Either way, money is fleeing the developed world and gushing into the emerging markets and it is causing inflation. Yes, it is possible to export inflation.
In that respect the deflation in the United States and the inflation in the developing world are part of the same phenomenon. It is all a part of the Great Money Shift, via Bloomberg:
While countries from the U.S. to Japan are considering measures to fend off deflation as the global economy slows, investors are betting the inflation rate in Brazil will hold above the government’s 4.5 percent target unless policy makers curb spending or raise interest rates. Dilma Rousseff, who is leading in polls ahead of the Oct. 31 election runoff, called reducing spending a “crime” in an August television interview.
“The market doesn’t have a very strong belief that the next government will act on the fiscal side to contain public spending,” said Marcelo Schmitt, a fixed-income portfolio manager at SulAmerica Investimentos in Sao Paulo who bought inflation-linked bonds three months ago. “The market is expecting more inflationary pressure lasting for longer periods, extending throughout 2011.”
Yields on Brazil’s 6 percent notes due in August 2012 that offer protection against inflation fell 41 basis points this month to 5.52 percent, according to data compiled by Bloomberg. Yields on the 10 percent fixed-rate notes due in January 2013 declined 4 basis points to 11.97 percent.