April 11, 2011 / 6:19 PM / in 7 years

WITNESS-My aunt, and the lure of the Brazilian real

SAO PAULO, April 11 (Reuters) - I haven’t seen my Aunt Thelma in about 15 years, so imagine my surprise when an email rolled in on Sunday with the subject line: “Brazilian real.”

“I am considering investing a small amount in the carry trade,” the email began. And my first thought was: Wow, if 65-year-old retired insurance adjusters in Pottsboro, Texas, are buying in now, how much longer until this bubble pops?

Sure enough, Aunt Thelma's email was like a case study on why Brazil's currency has appreciated 50 percent since 2009, and 5 percent in just the last two weeks. She wants to use U.S. dollars to borrow yen JPY= and then set up a short-term account in Brazilian currency BRBY, reaping yields that are far beyond anything to be had these days in the developed world.

“I hear about a 12-13 percent interest rate in Brazil,” she wrote. “Any particular caveats for me to be aware of?”

Now, Aunt Thelma (not her real name) is pretty savvy with money -- certainly better than her nephew who, after all, chose a career in journalism. And there are all kinds of economists and other Wall Street folks out there who would tell her that the real, currently trading at about 1.57 per dollar, is headed next for the 1.50 threshold -- due to a nonstop torrent of dollar inflows from yield-hungry investors just like her.

Yet as somebody who actually lives in Brazil, I see reasons for caution virtually every day. Indeed, some experts warn that -- to use a phrase from my home state that Aunt Thelma would understand -- this dog won’t hunt for much longer.

For one thing, some prices in Brazil have lost any anchor with reality. The Big Mac, that handy barometer of international prices, now goes for $6.20 in Sao Paulo -- compared to $3.56 at a McDonald’s in North Texas. (Thanks for checking, Mom.) Rent for a three-bedroom apartment can easily set you back $3,500 a month. Executive pay is now higher than in New York or London.

The situation is such that Goldman Sachs christened the real the world’s most overvalued major currency -- and that was last year, before the government decided to give in to an even stronger currency, and back when I could afford to take my kids out for more than just cheeseburgers.


The currency’s strength is in part a product of something very real -- Brazil’s bona-fide emergence during the past decade as a major economic power and a relatively safe place to invest. In fact, Brazil’s economy is so robust that it came through the 2008 global crisis largely unscathed, which is one reason why it’s attracting so much “hot money” now.

Some economists argue the real will remain strong at least until the U.S. Federal Reserve starts raising interest rates -- and maybe longer, given Brazil’s popularity among investors as it prepares to host the 2014 World Cup and 2016 Olympics.

But didn’t the 2008 crisis also teach us that, when prices for something patently don’t make sense, that’s usually a pretty sure sign of a bubble? That is, if million-dollar McMansions in the middle of the Arizona desert were completely insane in retrospect, then what to make of paying nearly $50,000 for a simple new four-door Hyundai sedan in Brazil?

Then there is the matter of the Aunt Thelmas of the world. Virtually every financial bubble in history has been followed by accounts of the retail investors who got suckered in just as the game was up. When I covered the Argentine financial crisis of 2001, it was the poor Italian pensioners who got stuck with the worthless government bonds. My Texan friends who bought a Miami condo “as an investment” in 2007 ... well, they spend a lot of time in Florida these days.

So what did I tell her? I explained that Brazilian assets in general looked solid, as strong economic growth is expected for years to come, but looking at the analysis from a number of market strategists, she might be late to the game for a pure speculative play on rates and currency.

I also added the following caveat: Be wary of financial advice from anybody who was short-sighted enough to accept a job in Brazil that pays 100 percent in U.S. dollars!

Editing by Todd Benson and Stella Dawson

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