Dilma's Popularity

A regression of popularity (Government considered excellent/good, source Datafolha, very similar to Ibope or Census, but longer data) in four determinants: (i) lag of popularity, (ii) GDP growth, (iii) inflation, (iv) real exchange rate.

Is unemployment irrelevant? Yes, in contrast with some specifications I saw around, which forgot to put lagged variables and had nonstationary residuals, I found unemployment to be irrelevant. I’m happy with this, as the unemployment series is total crap.

Are the regressors endogenous? Shit yeah.

In the first picture a forecast. Assuming growth at 2%, inflation at 6% and BRL at 2.40, popularity trends up to 45. Shit yeah.

In the second picture, which shows the residual of the regression, a curiosity. The effect of the “passe livre” street movement was huge, but vanished.

Hermanos Argentinos y nosotros

1 - They are heading towards economic disaster

2 - Argentina is the major foreign market for Brazil's manufactured products (1/4 of this sector exports)

3 - Brazilian industrial sector is in bad shape as of now

4 - [fill in this blank]

Euro Negative Deposit Rate

4 reasons for betting on negative deposit rate

1)      In the Picture the 3mo Euro CPI, a nervous but leading series.

2)      No theoretical reason for saving ammunition for later (only the contrary, the Central Bank should do the most before too late, especially if it’s about to run out of weapons)

3)      Draghi is somehow able to lead that messy board

4)      I’ve been so right on the Euro during the last year that it’s about time to make a mistake, so that no one thinks I have inside info

Cariocas 1 x 0 Gringos

During 2013 there was a stark contrast bw cariocas' and gringos' opinions about Brazil. Cariocas were very pessimistic, and were looking at how much Brazil got worse during the last couple years (a time series comparison). They would pay rates, sell BRL and Ibov. Gringos would say Brazil was a lot better then South Africa, Turkey, etc. (a cross section comparison). They didn't see a smoking gun, and received rates, sometimes with no FX hedge.
Prices, we know, so far supported the Cariocas. But I would say there is even more to it. My recent talks with gringos indicate they also became pessimistic with Brazil, converging and accepting Cariocas' views. Only weird thing is that they still seem to believe Dilma will become more pro-market, and do some fiscal adjustment after the election. If they keep believing this, elections should be good time to sell Brazil.

Argentina impact over Brazil

Blue curve is Argentinean GDP growth. Red. and green are respectively Brazilian exports to and imports from Argentina. For some reason I don't know exports are more affected than inports when Argentina collapses (we are talking about vehicles and parts, both ways). Forthcoming collapse should imply about $5 bi less for Brazilian trade balance, or .25 pp of GDP. This does not take into account the financial impact - I believe gringos will differentiate the risks of Brazil from those from Argentina, as they did in 2001, after all Cristina is better than Dilma

Vulnerability to EM

I liked this picture, from BCA. Even though Japan is very closed, it is a lot more exposed to EM than the US.

Confidence vanished

I thought that the concessions program going ahead -- as it is -- confidence would return, even if modestly, to the brazilian entrepreneurial sector. It did not. Investment plummeted in the second semester, and did not recover.

This suggests the government managed to do great harm to investors' animal spirits with its "new macro matrix" which came accompanied by unprecedented micro interferience (including here public credit and its attendant misallocation of capital). At this juncture, my call is that nothing other than a thorough change in command can revert this dullness.

Unfortunately, this looks unlikely.

Happy 2019!