New Riches in a New Miracle Economy

Joe and Martin Weiss, near Brasilia, Brazil

Brazil’s economy is booming, and I can assure you, it’s not a bubble.

I am also certain that the vast riches being made are not a flash in the pan.

Let me tell you why I’m so confident.

First, because my family and I are in Brazil right now and I can see it with my own eyes.

This past Saturday night, for example, my brother’s grandson graduated from middle school; and we attended the ceremony in São Paulo, Brazil’s biggest city.

The prosperity and optimism in the hall was so tangible, I could practically touch it.

Friday, at a very different kind of ceremony on our farm, the sentiment was identical; and we see the same pattern in every city and ever region.

Second, I’m confident because of the robust construction activity all around us, the new superhighways in development and even some of the old roads — finally without potholes.

And third, I know because of the numbers:

In the four quarters ending September 31, Brazil’s economy grew 7.5 percent compared to the prior four-quarter period. And if you measure growth from January of this year, the numbers look even better: GDP is up a whopping 8.4 percent compared to the first three quarters of 2009.

Looking ahead, conservative estimates of Brazil’s growth in 2011 exceed 7 percent. If they’re wrong, it could be even better.

Meanwhile …

• Brazil’s budget deficit is only 3 percent of GDP, compared to over 10 percent in the U.S.
• Brazil’s foreign debt is close to zero, compared to the largest foreign debts of all time owed by the U.S.
• And Brazil’s government debt burden (owed almost entirely to domestic creditors) is expected to shrink to about 30 percent of GDP in the years ahead. In contrast, the Obama administration’s Office of Management and Budget projects that the U.S. debt burden will surge past 100 percent of GDP by 2013. But worse, with the new law signed by the president on Friday, we could cross that dangerous threshold as soon as next year.

What about 2008 when the U.S. — plus most of the world — was shaken by the worst financial crisis since the Great Depression? Brazil’s economy still grew 5.4 percent in that year.

In retrospect, all this is now very obvious and widely recognized by Brazil specialists.

But it wasn’t always that way …

From Debt Pariah to Cash King

They said I was crazy.

The time was early January 2003. Elisabeth and I had just returned to the U.S. from our yearly trip here — a few days after the new president, Luiz Inácio Lula da Silva, was sworn into office in Brasilia.

At the time, every financial analyst I spoke to or heard of was saying Lula would trash Brazil’s finances, gut Brazil’s federal budget, deliberately default on Brazil’s foreign debts, and kill Brazil’s currency. They insisted the country would soon become a debt pariah, shunned by the global investment community.

I said precisely the opposite. I told anyone who cared to listen that Lula would tolerate no such nonsense. If anything, he would pay down the country’s debts, strengthen its currency, and make Brazil a king of cash.

That’s why they said I was crazy.

What they didn’t know was Lula as a person. But I did — through my brother, Joe Weiss, and through Joe’s wife, one of a handful of founding members of Lula’s party.

Indeed, during some of his first political campaigns, when Lula traveled to Brasilia, he used to stay at Joe’s home. Later, when Joe moved his family to New Jersey, Lula’s son lived with them as an exchange student.

I didn’t meet Lula personally until 1993 when he came to New York City. Dad made the introductions so that Lula could give a major policy speech at Bear Stearns. Meanwhile, Joe, his wife, and I escorted Lula to the event and to interviews with the editors of The New York Times and other major media.

After Lula returned to Brazil, Dad and I talked frequently about the country’s prospects under a future Lula administration; and from the outset, one thing was very clear: Despite his leftist roots, Lula was a die-hard fiscal conservative who would toe a tough line on virtually everything related to money.

“I don’t agree with his politics,” Dad said. “But on a gut level, he’s like me. His family was dirt poor. He was raised pinching pennies. He abhors big debts.”

To Dad and me, that was worth more than all political rhetoric in the world — and sure enough, Lula did not disappoint us:

• Instead of deliberately defaulting on Brazil’s foreign debts as the radical wing in his party had proposed, he did precisely the opposite. Lula paid off foreign debts — down to the last penny.

• Instead of bowing to the demands of the electorate and pushing for economic growth at any cost — the natural tendency of political leaders almost everywhere — he again did the opposite. “Growth,” Lula said, “will have to wait. First, we’ve got to tighten our belts, get our finances in order. THEN, and only then, can we focus on growth.”

• Unlike the U.S. Federal Reserve, which pushed interest rates down to nearly zero to stimulate the economy, Brazil’s Central Bank under Lula generally let the supply and demand for money determine the appropriate level, often lifting rates to double digits. That was tough for many consumers. But it also prevented a mortgage and housing bubble.

That’s why …

After an average yearly GDP growth rate of 2 percent in Lula’s first four-year administration, Brazil’s growth has more than doubled — to an average of 5.1 percent in his second four-year term. And as I mentioned a moment ago, it’s now sailing along at a clip of over 7 percent.

Brazil is the only country in the world that’s similar to the United States in terms of population, land mass, values, and democratic institutions.

Brazil is the world leader in the production, consumption, and technology of ethanol. Ever since 1976, ethanol blends have been mandatory; and ever since 2007, ethanol has been dominant.

Every fuel station in the country offers a choice of ethanol or gasoline; and more than 10 million cars on the road use flex engines, which adjust their pistons automatically to the octane level of the fuel.

We drive our car up to the fuel pump. We select whichever fuel is less expensive or more efficient — gas, ethanol, or any combination of the two. And we drive off.

Bottom line: Brazil is one of the world’s most promising — and least risky — emerging market investment for U.S. investors, whether you use a simple ETF, like EWZ, or you buy Brazilian blue chips traded on the New York Stock Exchange.

The Next Ceremony

Brazil’s president-elect Dilma Rousseff with outgoing president Luiz Inácio Lula da Silva in Brasilia last week.

Twelve days from now, on New Year’s Day, Lula’s presidency will end. He leaves with a new, all-time record popularity rating of 83 percent.

And Dilma Rousseff, his chosen successor, will be inaugurated as Brazil’s first woman president.

No one can guarantee the future. But just as I did eight years ago, I can affirm that she will also be tough as nails when it comes to money.

No out-of-control deficits! No wild money printing! No grand compromises to gut the budget!

As a loyal American citizen, I wish I could say the same about the United States. Someday in the future, perhaps. But not this year, and probably not for years to come.

Good luck and God bless!

Martin