Last week we put forth our thesis that riots in Turkey and protests in India were not really about the professed causes but simply the results of the bursting of the EM bubble. This week Brazil was hit with massive protests. The scale of the protests was staggering as shown in the absolutely splendid photo below.
The Government had no clue. According to the New York Times, Gilberto Carvalho, a top aide to President Dilma Rousseff, told senators on Tuesday “It would be a presumption to think that we understand what is happening,”.
Actually it is pretty simple according to our thesis of the bust of the EM bubble:
- We see a global phenomenon that is becoming common to all emerging markets, a pernicious fall in economic expectations, a concentration of wealth among the connected crony networks and a rise in rage among the young professional class.
Why doesn’t the Brazilian Government get this? As a NYT article states:
- “The swell of anger is a stunning change from the giddy celebrations that occurred in 2007, when Brazil was chosen by soccer’s governing body to host the World Cup. At the time, dozens of climbers scaled Rio de Janeiro’s Sugar Loaf Mountain, from which they hung an enormous jersey with the words “The 2014 World Cup is Ours.””
Remember 2007? The absolute top of the global credit bubble, the bubble that made BRIC the most admired word in the world. China got the accolades from the public but the financial cognoscenti were all agog about Brazil. It was the age of the commodity supercycle and Brazil was the commodity superpower of the world.
And now? The Financial Times tweeted this week, “Food fight: prices in Brazil up 13.5% y/y thru May; tomato prices have at least doubled”. Food inflation in a country that Colin Powell termed the “Agricultural superpower of the world”?
The New York Times added its voice:
- “inflation, a scourge for decades until the mid-1990s, has re-emerged as a worry for many Brazilians.”
As the purest commodity play in the Commodity Supercycle, Brazil was perfectly positioned to benefit from the EM bubble. That didn’t change after the collapse of the credit bubble in America. When US Federal Reserve Chairman Bernanke launched his Quantitative Easing (QE) program, meaning when he opened his fire hose of liquidity, investment capital flooded emerging markets. Bernanke was petrified of deflation-like conditions taking root in America and his QE was designed to create inflation.
Naturally commodities rose to a higher price plane and foreign capital flooded into Brazil. The flows were so great that it catapulted the Brazilian Real to a new higher & dangerous level. So Brazil actually imposed a tax on incoming foreign capital to stem capital inflows.
As in all emerging markets, the initial flows were put to good use by the Brazilian government. The NYT quotes praise from sociologist Marcelo Ridenti, ” … government’s own success at diminishing inequality and raising living standards for millions over the last decade. The number of university students doubled from 2000 to 2011″.
But with this development came rising expectations just like in India & Turkey. In the words of sociologist, Marcelo Ridenti:
- “This generates
huge changes in society, including changes in expectations among young
people,” he said. “They expect to get not only jobs, but good jobs.”
Instead of fulfilling these rising expectations, Brazil handled the incoming capital like India & Turkey:
- “A larger and
larger amount of incoming capital and economic growth got diverted to
the new politico-business class and the broad economies began becoming
starved for capital. … Inflation began rising and the purchasing
power of rising wages began proving insufficient for keeping up with
As a result, according to the NYT article:
- “The economic growth that once propelled Brazil’s global ambitions has slowed considerably, … “
- “On Wednesday, tens of thousands protested outside the newly built
stadium where Brazil faced off against Mexico in the Confederations Cup,
as the police tried to disperse them with tear gas, rubber bullets and
pepper spray. In what would normally be a moment of unbridled national
pride, demonstrators held up placards demanding schools and hospitals at
the “FIFA standard,” challenging the money Brazil is spending on the
World Cup instead of on health care or the poorly financed public
Brazil spent an enormous amount of money on grandiose projects to proclaim Brazil’s rise to the world stage while the conditions of Brazilians remained unsatisfactory. This is eerily similar to the vision & plans of Turkish Prime Minister Erdogan to resurrect symbols of Turkish Ottoman greatness while the conditions of young urban Turks remained lackluster.
Such monuments, which created pride a few years ago, now foster resentment as the consequences of the EM bust flow becomes widespread. As we wrote last week,
- “Their expectations, desires and needs have been elevated to a new permanently higher plateau but their reality has worsened. … The young professional middle classes no longer see a guaranteed rosy future ahead. … Their
sense of entitlement is being shattered and they are afraid of losing
their dream. This fear, this anger about society that failed them and
their sense of utter powerlessness is driving the fury we see in the
streets on Istanbul, Delhi and the rage astute observers see in young
See the same rage in this week’s pictures from Brazil:
The storm in EM was simply and profoundly explained by David Woo* of BAC-Merrill Lynch a few days ago. The growth of most EM countries, especially commodity producers like Brazil, was built on exporting to China and importing investment capital from America. Now, as Woo explained,:
- “emerging markets in some sense are facing a perfect storm. I mean the combination of China getting worse and the U.S. doing better actually is a bad combination for emerging markets. Think about it. most of them basically do, make a living selling to China, but at the same time with the current deficit by attracting the highly mobile capital [from USA]“
This explains why the Bovespa, the Brazilian stock market, fell 9% just this week. Bernanke stunned the world this week by sounding more hawkish about tapering his liquidity injections and Chinese economic indicators showed both a weakening Chinese economy & a liquidity problem in China.
Bernanke began warning about reducing liquidity on May 22. How has the Bovespa performed since May 21? Down 20% in one month since May 22, 2013.
So if you want to understand why Brazil finally exploded this week, don’t look at TV heads, don’t read pontifical reporters writing about local reasons. Look at the chart above and understand that what is happening to Brazil is:
global phenomenon that is becoming common to all emerging markets, a
pernicious fall in economic expectations, a concentration of wealth
among the connected crony networks and a rise in rage among the young
The EM mega trend & the resultant flood of foreign capital into economies not big enough or structured enough to absorb it was a financial tsunami. Now as the waters recede, the damage is becoming obvious and the rage is bursting out.
* for a more detailed treatment of Mr. Woo’s comments, please refer to Section 7 in last week’s financial summary article
Send your feedback to [email protected] Or @MacroViewpoints on Twitter