The Subprime Primer

Please forgive me for being absent this semester. I had no time to blog since my last post but I intend to resume blogging on a regular basis after Xmas.

In between, I decided to post this sketch I received from Victor Arakaki on the subprime mess.

We say that a good joke is worth more than a thousand words, right? Please check this out, you won´t regret.

Enjoy,

Vitoria









































































Source: Victor Arakaki

Por Que as Bolsas de Valores Nos BRICs Estão Subindo Tanto?

Nas últimas semanas, os mercados de ativos nas economias maduras - após subirem de forma brutal por três meses - fizeram uma pausa e começaram um período de correção nas últimas semanas.

Até que esssa última correção recente começasse houve um significativo aumento no preço dos ativos. De fato, esse movimento de alta tem sido verificado de forma sistemática desde da segunda semana de março de 2009. Observou-se altas no mercado de ações, elevação dos preços de petróleo e alta no preço das commodities. Do lado monetário, verificou-se uma contração nos spreads de crédito sugerindo um aumento de confiança no setor privado. Além disso, o fato das taxas de juros de longo prazo dos títulos do tesouro americano subiram de 2% para 4% sugerindo que o mercado esta prevendo crescimento econômico num futuro próximo. Um outro fator positivo importante é a recente queda da volatilidade dos preços dos ativos, indicando um aumento de confiança e um redução na aversão ao risco.

Nos mercados emergentes, os preços dos principais ativos - ações, títulos e moeda - nunca estiveram tão otimistas. De fato, os índices dos BRICs estão mostrando que desde o início de 2009 alguns investidores começaram a acreditar que essas economias - a começar com a China – devem registrar um significativo crescimento econômico em 2009 e tal crescimento vai tender a aumentar ainda mais o preço das commodities.
No caso do Brasil, a Bovespa atingiu em meados de agosto o nível mais alto dos útlimos 11 meses sobretudo em virtude do aumento de confiança que a recessão generalizada está terminando e que a perspectiva é de melhoria do cenário global. De fato, em julho a Bovesta teve o seu melhor mês desde 1998 sendo que a razão de tal excepcional performance está relacionada a significativa melhoria do cenário internacional.

No caso da China, após registrar queda de 70% no final de 2007, o Índice composto de Shanghai (Shanghai Composite Index) registrou impressionante alta de 91% no acumulado do ano de 2009 até julho. As razões de 'price/earning`mais do que dobraram sobretudo considerando o nível baixo que se encontravam em novembro de 2008. A excepcional performance do mercado de ações na China está relacionada as expectativas que a recuperação da economia chinesa caminha a pleno vapor.
No caso da Índia, a bolsa de valores subiu 47% no acumulado do ano de 2009 até julho. De fato, o índice caiu no início de 2009, fazendo a Índia ficar atras do Brasil, Russia e China (BRICs) no primeiro trimestre de 2009. De fato, o mercado atingiu um piso em começo de março de 2009 e desde então subiu 94% desde março até julho de 2009. A subida de 28% em maio de 2009 é o melhor ganho mensal da bolsa indiana desde 1992. Entretanto, o otimismo do mercado indiano está refletindo a incerteza quanto a recuperação econômica nos Estados Unidos. Deste modo, o mercado indiano também tem apresentado elevada volatilidade em virtude da incerteza quanto ao rumo futuro da economia americana sobretudo se a recessão já acabou mesmo ou não.

No caso da Rússia, as ações tiveram uma longa alta de nove meses, com o petróleo sendo negociado a $71 por barril. As projeções otimistas para os metais aumentaram o preço das ações de minérios. O índice da bolsa de valores da Russia - Micex - subiu 90% em seis meses sobretudo considerando que o petróleo - o principal item da pauta de exportação russa - mais do que dobrou desde que atingiu o nível mais baixo de fevereiro de 2009.

Em outras palavras, os mercados centrais que há quatro meses atras estavam precificando uma profunda recessão com um formato de L passaram a precificar uma rápida recuperação em formato de V com as economias centrais crescendo próximo ao produto potencial. A melhora das expectativas econômicas nos países centrais pode ser explicada sobretudo pelas ações agressivas tomadas pelo Federal Reserve, pelo Tesouro americano. Fora dos EUA, cabe mencionar o expressivo pacote fiscal lançado pela China em novembro de 2008. De modo análogo, Índia e Brasil também lançaram suas versões do "Paulson Plan". Ou seja, todos os grandes países em diferentes graus entenderam que a mera utlização de política monetária seria insuficiente para retirar o sistema da profunda recessão mundial. Não há duvidas atualmente que o risco de uma recessão em formato de L é quase inexistente.

Muito embora o aumento de confiança na economia global explique o excepcional desempenho do mercado acionário nos BRICs e nas economias desenvolvidas, é preciso lembrar também que os fundamentos não são o único fator em movimento. É possivel que uma parcela da alta de alguns mercados esteje ligado à maior liquidez, especialmente considerando que os governos aumentaram a liquidez do sistema e somente agora tal aumento da liquidez está chegando no mercado de ativos.

Atualmente os mercados estão precificando que a recesssão já está chegando ao fim. Nas economias centrais, a recuperação deve ocorrer, muito embora os fundamentos dessas economias - em especial EUA, zona do Euro e Reino Unido - estejem ainda bastante deprimidos. Há problemas profundos no sistema financeiro desses países, no sistema de hipotecas, entre outros que inibem uma retomada sustentada do crescimento econômico nos países centrais. Há também poucas dúvidas que os elevados déficits fiscais que estão sendo monetizados venham a aumentar as expectativas inflacionárias futuras. Sem dúvida em algum momento os EUA terão que reduzir a elevada dívida federal. De fato, a dívida pública americana vem crescendo a taxas maiores do que a taxa de crescimento do PIB. No final de 2008 a dívida publica era equivalente a 41% do PIB e conforme projeções do Congressional Budget Office a dívida pública americana deve aumentar para 82% do PIB em 10 anos. A elevada dívida pública americana é apenas um dos muitos problemas a serem resolvidos pelos EUA nos próximos anos.

Neste cenário de início de uma recuperação gradual das economias centrais há poucas dúvidas que os mercados emergentes devem ter uma melhor performance do que as economias centrais. Entre os emergentes, o destaque especial são os países que compõem os BRICs - Brasil, Russia, Índia e China. Não há dúvidas que mesmo os BRICs também dependem da demanda externa, como fonte de crescimento e, neste sentido, não podem descolar totalmente do ritmo da recuperação da economia mundial. Por outro lado, esta crise mostrou que a demanda doméstica de países como China e Brasil estão sendo capazes de sustentar o crescimento do PIB destes países num momento onde o mundo está registrando taxas de crescimento negativas.

Em síntese, as bolsas de valores dos BRICs estão refletindo a euforia do eventual final do cenário recessivo a nível mundial. Além disso, esses mesmos países também injetaram liquidez no sistema e possivelmente tal aumento de liquidez esteje atigindo os principais mercados de ativos. A recuperação econômica dos países centrais - leia-se EUA, zona do EURO, Reino Unido e Japão - deve ser tímida em 2010. Em contraste, os BRICs devem registrar elevadas taxas de cresciemento em 2010, com China liderando o grupo (8.9% de crescimento projetado para 2010 e 7.7% para 2009), seguido de Índia (7.3% para 2010 e 5.7% para 2009), Brasil (4% em 2010 e 0.5% em 2009) e Rússia (1% para 2010 e -8.1% para 2009).

A Brief Overview on Latam FX and Brazil´s Inflation and Selic

FX Perspectives in Latin America
In contrast to Emerging Europe, Latin America has emerged out of the crisis as more resilient. This is so in part because of flexible exchange rates, lower leverage than Emerging Europe and better macro conditions. In fact, some countries in Latin America are implementing counter cyclical fiscal policies to fight the external crisis. The key countries using counter cyclical fiscal policy in Latam are Brazil, Peru and Chile. This differentiation adds to the perception that Latin American credit ratings lag other emerging markets and the near-term prospects for rating actions in regards to several regional countries on the cusp of an investment grade including Brazil, Colombia, Panama, Peru and Costa Rica point to the upside. Regarding growth, we believe GDP will converge to its potential level by mid 2010. In the absence of significative inflationary pressures, it is hardly possible that monetary authorities in key Latam countries hike rates until Q2 2010. In turn, it is possible that FX play an imoportant role especially considering that moderate growth rates may also induce central banks to become more tolerant with eventual currency weakness.

Brazil: Inflation and Interest Rates Decision
The latest BCB's consensus survey showed significant upward revisions in inflation expectations, with the median of 2009 IPCA projections increasing to 4.50% (from 4.42% in the previous week), after hovering below the target midpoint for four months deterioration in the inflation scenario. It is not only the short term inflation expectations tht are deteriorating mostly because the 2010 expectations are also pointing to the target midpoint, with this week posting 4.40% from 4.43%. The clear signs that the economy is already expanding, along with the definition of the 2011 target at 4.50%, in an election year should move 2010 market expectations to 4.50% in the coming months, but still significant local and global idle capacity should prevent inflation expectations from moving above targeted levels. In our opinion, this picture is in line with the Copom delivering one more round of rate cuts (by 50bp) this month, which would leave the Selic at 8.75% until July 2010.

Recover in Sight - the IMF Take on the World

The IMF has just released an update of its World Economic Outlook. The main news is that growth during 2009-10 is now set to be 0.5% higher than forecast by the IMF in April, reaching 2.5 percent in 2010. The IMF recognizes that they overestimated the size of the recession in both, US and Japan.

In the same report the Fund says that financial conditions have improved, as forceful policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Clearly the world wide policy response in both - finance and macro - have minimized the risk of a systemic crisis and indeed improved market confidence. The IMF emphasized thatr recovery likely to be sluggish

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow as financial institutions remain weak and credit intermediation impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

According to the IMF the main policy priority remains restoring financial sector health. Macroeconomic policies need to stay supportive, while preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the same time, given weak internal demand prospects in a number of current account deficit countries, including the United States, policies need to sustain stronger demand in key surplus countries.


For the IMF:

"In the United States, high-frequency indicators point to a diminishing rate of deterioration, including in the labor and housing markets. Industrial production may be close to bottoming out, the inventory cycle is turning, and business and consumer confidence has improved. These developments are consistent with stabilization of output during the second half of 2009, with a gradual recovery emerging in 2010.

In Japan, following a dismal first quarter, there are signs that output is stabilizing. Improved consumer confidence, progress in inventory adjustment, aggressive fiscal policies, and strong performance by some other Asian economies are expected to lift growth in the coming quarters.

In the euro area, consumer and business survey indicators have been recovering, but data on real activity show few signs of stabilization and thus activity is projected to strengthen more slowly than elsewhere. Macroeconomic policies are providing support, but much of the adjustment in the labor market still lies ahead. Rising unemployment will weigh on consumption and activity, as will the economy’s heavy dependence on a still-ailing banking sector.

Emerging and developing economies are projected to regain growth momentum during the second half of 2009, albeit with notable regional differences. Low-income countries are facing important challenges because official aid has fallen and these economies are particularly vulnerable to swings in commodity prices."

In brief, EM will grow by only 1.5% in 2009 but will rebound to 4.7% in 2010. China will grow by 7.5% in 2009 and 8.5% in 2010. India will also present high rate of growth of 5.4% in 2009 and 6.5% in 2010. Asia will contract by 0.3% in 2009 before growing 3.7%. In contrast, some regions will post negative growth: Latin America (-2.6), Eastern Europe (-5) and CIS (-5.8).

Brazil: Inflation, Fiscal Sector and Selic

The BCB inflation survey suggests a gradual increase in inflation expectations. Hoewever, expectations are not a problem since they are below the midpoint of 4.5%. The IPCA forecasts for 2009 reached 4.42% and 4.33% for 2010 suggesting a mild increase from a month ago. Our forecast for IPCA inflation for 2009 is 4.1% comfortably below the center of the official target (+4.5%) and lower than the reading for 2008 of 5.9%.

From inflation to the fiscal sector, the government is denying an eventual reduction of the primary surplus for 2009 from 2.5% to 1.85% especially because the government is spending on infrastructure, on the one hand, and there has been a decrease in tax revenues due to the decline in economic activity. Even if there is no change in the primary surplus it is important to stress that the current fiscal performance is below the 2.5% target (it reached 2.3% of GDP in May). The trend is to expect further deterioration considering the mandatory spending that will happen in the near future. In brief, primary surplus over GDP should see a fall from the 4.1% in 2008 to a likely 2.2% in 2009. It remains to be seen if the government will be able to restore the 3% primary surplus next year, when economic activity improves. In turn, the public debt over GDP should increase from 42.5% in 2008 to 44% in 2009.

Considering the favorable inflation scenario, the absence of cost pressures, stability of commodity prices we believe that the Central Bank of Brazil has reached the end of the monetary easing. We expect one more round of cuts by 50 bps to 8.75% and from then on the monetary authority should maintain the Selic stable until year end.

The IMF and the Special Drawing Rights Bonds

As we mentioned before here, the IMF is planing to sell bonds for the first time in its history as part of its efforts to raise new funds. We have also explained that China and Brazil have announced their intention of buying the notes, denominated in special drawing rights (SDR). SDR is the IMF currency and is a basket of currencies. In my opinion, China and Brazil are being generous enough to lend IMF money mostly because both countries want a larger voting share at the IMF.

In any case, by July 1, the IMF announced that the board approved a framework for issuing notes to member states. Interest payments will be made quarterly SDR interest rate, a weighted average of 3-month interest rates in the U.S. dollar, euro, yen and pound sterling. The maximum maturity of five years, consistent with IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements. The IMF already has welcomed commitments from Brazil and Russia to buy $10 billion of new IMF bonds each, and for China to purchase up to $50 billion of new debt. India, Korea and Saudi Arabia have also expressed interest.

For some analysts, the IMF bonds are not competing with US treasuries. According to Prasad these bonds could substitute for other reserve assets, meaning buying them might have little budgetary implications, and facilitating diversity of reserve holdings--which might boost yields of US bonds. Moreover if the assets were of limited duration (12-18m), EMs could restrict the timing of their financial support to press for governance reforms. These bonds would be traded only among the IMF and official agencies, i.e., central banks of member countries without a secondary market for private investors to acquire or trade these instruments. The bonds are likely to be denominated in SDRs and pay an interest rate linked to the SDR interest rate.

One should bear in mind that this extra funding was decided at the G20 meeting where authorities decided to triple the IMF funds to $750 billion. In this context, the issuance of these SDR bonds will come from the BRICs country as a way of accomplishing the $750 bn goal. Since August 2008 the IMF has lent approximately $50 billion. Most of the countries that have received IMF loans are emerging market countries and the extra funding will be lent to other EM that might need funding due to the global financial crisis.

Trade Balance Outlook for 2009

Over the past couple of weeks, the data released have reinforced that the external accounts are improving, ultimately supporting the favorable trend in the BRL.
The trade balance in June surprised the market to the upside and reached a strong USD 4.6bn surplus. On an anualized basis, trade balance was running above USD 27.5bn surplus accumulated in the twelve months to June. Exports’ performance was key for such dynamics. Indeed, they recover by 19% s.a. up to June 2009 in nominal terms. For imports, if we compare to August 2008 (which was the peak) it decreased by almost 50% (45% indeed) until April 2009.

In terms of price and volume we notice a significant improvement in the terms of trade since early 2009 given the stabilization of commodity prices.
The main reason for the improvement in the nominal trade balance has been the faster recovery of the volume of exports than the volume of imports.
The exports-to-imports volume ratio rose by 32.5% from October 2008 (the recent bottom) until May 2009, surpassing, by far, the contribution from the
improvement of the terms of trade to date. While we don´t have date, it is highly possible that the recovery of exports was driven by China. Indeed, in 2009 China´s imports of Brazilian products increased by 150%. Also, we have observed an modest increase of Brazilian exports to Europe (15%) in the year until May.

Looking forward, the trade balance should continue to receive support from the positive terms of trade shock.We expect merchandise trade balance to post a surplus of $23.5 billions for the entire year of 2009, a small decrease compared to the 2008 surplus of US$24.7 billion. It comes as a positive surprise for Brazil that exports will not present a significative fall in 2009 especially considering the magnitude of the global financial crisis. We expect the real to appreciate throughout the end of the year to a range of BRL1.80 to 1.98 per U.S. dollar. According to our calculations we expect exports to be $152 billion, down from $198 billion in 2008. We will also observe a decline in imports in 2009. The recovery of domestic demand in 2H of 2009 will not be able to prevent the fall of imports in the year. Indeed, in our view, the weakening domestic demand is likely to curb imports to reach $128.2 billion in 2009,from $ 173 billion in 2008.