Brazil

Today was the perfect opportunity for GS to come with a revised much more bullish forecast for the economy. The nature of the arguments advanced seemed a bit suspect: basically foreign demand and public demand will more than make up the lack of private demand. That is excellent news but it may somehow miss out on the fact most governments in Europe are going to keep cutting drastically public spending, there are certainly new members in Congress trying make the country lean that way as well, and the brilliant Albert Edwards' chart on Chinese leading indicators is not exactly positive. Unfortunately now growth forecasts are becoming as volatile as the markets: it's the tail wagging the dog. The Fed must be proud in succeeding in having the S&P dictating the economy instead of following it. - Nic Lenoir

Personally I do not think the fundamentals have changed one bit. Certainly the private sector has surprised in November to the upside as people trampled their way to Black Friday bargains, but from there to extrapolate +3.7% growth in 2012 is more than an exageration. Probably more a good opportunity to short squeeze those who sold equities realizing Greece was only the tip of the European iceberg, with the help of $8Bn more in cash provided by the Fed.

To all who thought the bank system is insolvent only in the developed world, it appears there is a new development: Brazil is now on the hook too:

• PANAMERICANO LIQUIDATION COULD DESTABILIZE SYSTEM, FERREIRA
• PANAMERICANO ASKED SUPPORT OF BRAZIL DEPOSIT INSURANCE FUND

Net result: stock down almost 30%.

Today's preemptive currency war salvo comes courtesy of Brazil's finance minister Guido Mantega.

• BRAZIL'S MANTEGA CALLS ON U.S. TO CHANGE ITS POLICY STANCE

Hey Guido, join 99% of America. Worst case you can put your Playboy-posing daughter on prime time TV to tell the idiot American public that the Fed is destroying it.

The chart below from Reuters shows the recent timeline in Brazil's escalating attempts to prevent the surging BRL, and its increasing militancy vis-a-vis Ben Bernanke's printer. What is not shown on the chart is the nearly daily dollar buying intervention by the Brazil CB, of which one was announced literally minutes ago. Brazil's Finance Minister was the first person to call the current FX regime for what it is: an international currency war. Brazil also defected, literally, from the useless G-20 meeting last weekend in another indication it has had enough with the Fed's manipulative ways. And today, Brazil, which is so far proving to be the most vocal opponent to the dollar debasement QE2 strategy by the Fed, has announed that it will propose at the Group of 20 nations meeting
next month that the International Monetary Fund create an index
measuring currency manipulation.  The idea is to identify who is keeping their currency
artificially low to boost exports, Mantega said, lending
support to eventual actions against illegal subsidies at the
World Trade Organization. "The IMF would have to come up with a method to measure
which currencies reflect the structural situation of their
countries, which are floating currencies, and which ones are
forcing their hand," Mantega told O Globo newspaper in an
interview. Um, it is pretty simple who is (and will be) manipulating their currencies the most: exhibit A, Goldman's suggestion that the dollar is headed far lower.

The biggest non-event this weekend will be the upcoming peace crack pipe pow-wow between the world's most demented Keynesians when a bunch of bloated politicians and economists (except for their much smarter Brazilian colleagues who will instead be frolicking on Ipanema beach and enjoying the fruits of the most artificially-enhanced population on earth) sit down in Seoul and pretend they can come to some resolution over the globalized attempt to destroy all world currencies all at the same time as trillions in shadow money disappears each and every quarter. If this feels like a deja vu, it is - every single G-20 meeting in recent history has had an underlying FX focus, the result ends up being some token agreement, and the very next day the sell off in the dollar continues, as 20 other banks proceed to buy dollars in an act of futility against Ben Bernanke's death star fiat printer. In other words nothing will change. Even JPMorgan agrees: "On Saturday the G-20 may deliver their first statement on FX, and they may incorporate language which many countries have never collectively endorsed, but such a statement may not change much in practice. The status quo, whereby countries manage a dollar decline as best fits their circumstances as long as they don't deliberately strengthen the dollar, will probably persist for lack of a better option...The euro too would fall initially, since less intervention implies less reserve recycling. It would later rally as the dollar broadly declined." In other words - US middle class, a hotdog in Europe will soon cost about as much as it does in Disney Land.

The latest currency war escalation does not come from any of the usual suspects (the Fed-PBoC-BOJ-ECB-SNB hate pentagongram) but from non-axis player Brazil. And it's a doozy - the country's top economic officials have decided to cancel their trip to Seoul in what is likely the first jarring demonstrating of defection from the G-20 cartel. The reason for this last minute defection from the Central Banking proletariat , as given by Finance Minister Guido Mantega and cited by Reuters, is, appropriately enough: "currency issues." Nuff said. And while Mantega has decided to pay a last minute cancellation fee, he is not alone - the president of the central bank Henrique Meirelles has also withdrawn from the list of attendees, due the totally unforeseeable event of monetary policy meetings to be held on Tuesday and Wednesday. Obviously those were unheard of when the G-20 was scheduling the time and date of its location. Next up on defection watch: Hildebrand and Shirakawa. It will go oddly elegant in addition to the (FX) suicide watch they have been on for about a week.

From the FT: "An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness." Welcome to the new frontline. It is being played out at every 500x levered FX trade station. No prisoners are taken as those wounded are immediately shot. And the incursions have now entered stocks and bonds. Trading any assets is now retaliation against a central bank somewhere (most typically at Liberty 33 or at the Marriner Eccles building) which is engaged in open warfare against the world's middle class. And yes, the Brazil Central Bank earlier announced that it was heading unto the breach, buying yet more dollars for 1.7094 reais at auction, and has bought as much as $1 billion USD each day for the past two weeks, putting the Japanese intervention from two weeks ago to shame.

The first global currency wars are now delcared fully open. Participation for all non-gold standard backed countries is mandatory.

BN  11:47 *BRAZIL CENTRAL BANK TO BUY DOLLARS IN SPOT CURRENCY MARKET
BN  11:47 *BRAZIL CENTRAL BANK TO BUY DOLLARS 3:46-3:51 P.M. LOCAL TIME

When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars.  You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.

Earlier today Brazil held a treasury auction for National Treasury Bills due 2011 and 2012, Treasury Financial Bills due 2012 and 2014, and most importantly Fixed National Treasury Notes due 2014 and 2021. The bulk of the easy to sell treasuries were sold, especially the 2012 LTN Bills sold to yield 12,2863%, yet curiously Brazil announced that it had rejected all offers for its 2021 NTN bonds at auction. The attached chart demonstrates just which tranche failed to place. We are trying to uncover what the Bid To Cover on the 2021 NTN was, but more curious as to what rate investors were demand for this 11 year paper that forced the TesouroNacional to balk at selling at such a "high" rate, in essence leading to a busted auction.

After France, Spain and Italy were the main net notional movers in the prior week, the fear about the Eurozone continues, only this time spreading increasingly to the core. While the Italy move of over half a billion in net notional increase is not surprising, as many perceive the nation as the next weakest link after Greece and Portugal, the German spike is a little surprising, although less so when one considers the failed 30 year Bund auction yesterday. Other countries that fill out the list of top 10 deriskers in the prior week include Brazil, Russia, Japan, Kazakhstan, Greece (yup, they're back), and the UK, which made the 10th spot, as CDS traders finally focus on arguably the most troubled "developed" country in Europe.

Pimco's Michael Gomez, who recently shared the floor with Hugh Hendry, Marc Faber and Nassim Taleb, and who was likely the key voice in Pimco's recent decision to accumulate German Bunds, shares insights on the euro, Greece and new investment opportunities. Based on this Bloomberg TV interview, it is likely that PIMCO will soon be accumulating a variety of Polish and Brazilian sovereign bonds, as well as corporate bonds in Brazil, Mexico and Russia, with an emphasis on the first. With tens of billions in dry powder, PIMCO will likely have an increasingly risky EM exposure as it departs from its traditional MBS/UST portfolio.

This week showed just how jittery the IPO sentiment was, with so many IPOs pulled on "market conditions" even including perpetual cash cows such as porn sites. Now the weakness in the market is shifting to bonds. The latest casualty is Brazil's BES Investimento bank which has postponed a $350 million bond on "market conditions." We are not so sure if the reason is with "market conditions" or whether the true reason has to do with BES being a local unit of Portugues bank Banco Espirito Santo S/A. We anticipate any corporate entities that have a relation with an increasing number of European countries will soon become locked out from the capital markets.

Will 2010 be the year of sovereign defaults ... or can the boys duct tape the system together until 2011?

We have complained over the past few months that there is simply way too much liquidity in the system, and that this is creating asset bubbles all around the globe. While this is quite obvious looking at the performance of the S&P 500, no matter what you may hear on CNBC or from your mutual fund manager about fundamentals supporting this move, the phenomenon has been exacerbated in emerging markets. It makes sense after all. Given that the crisis was rooted in the US and many issues haven't been seriously dealt with other than putting a little bit of lipstick on the occasional pig, a lot of money has been going abroad with the USD weakening, and emerging or commodity currencies screaming higher.