Like equity markets everywhere, foreign exchanges in Latin America, Eastern Europe and Asia have taken quite a tumble over the last year and a half.

Yet this is not like the Mexican Peso Crisis of 1994 or the 1997 Asian Financial Crisis. Those downturns were brought on by poor government policies and financial mismanagement in these regions.

But these developing economies have since been rebuilt on sounder financial footing. Moreover, you’ll notice that the recent worldwide sell off in equity markets was brought on by problems with U.S. real estate, mortgage securities and banks, not in developing markets themselves.

Still, in their rush to avoid risk many U.S. investors are leaving – or avoiding – these emerging markets at precisely the wrong time.

Yet the risk premium is much lower than it used to be. Most developing countries have already evolved from communism to democracy and from state-controlled economies to free-market ones. There are plenty of other good reasons to diversify into these markets, too.

Let’s start with the big picture.

Emerging Markets – Covering 85% of the World’s Population

While emerging nations cover 77% of the world’s land area and represent 85% of the world’s population, they currently produce only 23% of the world’s gross domestic product.

That’s changing…

There are now 3.8 billion “middle class” people in the world today. Thanks to emerging markets, that number will double over the next 20 years.

As The Wall Street Journal wrote last month:

“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months, according to the United Nations. These men and women will need everything, electricity, water, food, health care, shelter, schools, computers and, of course, jobs. Many have the potential to improve not just their local environment but the world.”

Some companies in the West – and, of course, many of those in developing markets themselves – are set to enjoy an extraordinary period of prosperity.

These new consumers will need dishwashers, microwaves, laptops, cell phones, automobiles, eyeglasses, credit cards, pharmaceuticals, insurance and every other product and service we already take for granted in the West.

Why bet on companies that may (or may not) create a new cancer drug or hit a new gold strike or develop a faster computer when you can bet on dead certainties: companies that are busy meeting the enormous untapped needs of billions of new middle class consumers.

January, for example, was the first month ever in which car sales in China topped U.S. car sales. And it may be that way for the rest of your life – and your children’s lives.

Emerging Markets: Promising & Cheap

Right now the world’s emerging markets are both exceptionally promising and extraordinarily cheap.

Moreover, a lot of these developing market stocks are denominated in currencies that are tied to the dollar. (So a stronger greenback like we’ve seen lately won’t hurt them – or the dollar value of your securities.)

No wonder emerging markets manager Mark Mobius says he feels “like a kid in a candy shop.”

The potential in these markets is greater than it has ever been before. Anyone who can count to 180,000 (a day) should understand exactly why.

Source: Emerging Markets: 180,000 New Investment Opportunities… A Day

As food and energy inflation climb to their highest levels since 1990 worldwide, central banks in Latin America, the Baltics, Balkans and South Africa are raising interest rates. And if the U.S. was fighting a toxic cocktail of both inflation and deflation, the U.S. would probably raising rates too.

But now that commodities are hitting all-time highs, investors are losing confidence that central banks can arrest inflation.

Gold hit an all-time intraday high of US$1,033 an ounce in March. And now gold is heading to breach that level over the next few weeks, if not sooner.

Gold continues to blast past all currencies since 2005 – including the mighty euro, Brazilian real and the Canadian dollar. This tells me that despite big gains for most currencies against the dollar this decade, they pale in comparison to gold and other hard assets.

Monetary reflation is now alive and kicking just about everywhere. Central bank broader monetary aggregates continue to post high single or double-digit gains over the last 12 months. Authorities are growing desperate to revive sagging growth caused by the U.S. slowdown.

The U.S. dollar is probably one of the most undervalued currencies in the world at this point following a severe decline since 2002. I would not dump dollars now. Most U.S. assets from a foreign currency perspective are absolutely dirt cheap!

But if you expect a “muddle through” economic recovery to persist over the next 12 months – and I do – then the Fed will have to stay on guard as housing attempts to establish a bottom. This doesn’t imply the dollar must fall further. But it does suggest commodities and gold will continue to rally because most central banks will continue to print credit while they try to look concerned about inflation.

The majority of central banks raising rates in 2008 are only gradually draining liquidity from the financial system. These banks are also the smaller players on the global stage. The banks that matter most in creating inflation – the Fed and the ECB, however, continue to print credit and inject funds.

Inflation is trying to win and overcome deflation. In time, I’m betting on inflation.

ERIC ROSEMAN, Investment Director

Source: The Central Bank Mirage, Part II

Whenever Chavez gets a chance, he gives speeches in which he pretends to support the people that socially need it the most.Paradoxically, their policies have negatively affected the general population rather than helping them, hitting the bread basket (canasta basica) harder in the same lower social classes that he claims to protect.

A mother saying to her child: “Son; would you go to the store and buy a pack of noodles and a bottle of corn oil so I can fix lunch for us today?” to which she adds: “here, take more money with you just in case the prices went up again today” is, without a doubt, a common household conversation in Venezuela (as a matter of fact, it is a common household conversation in most of the countries with this new food inflation context, but is apparently much more serious in Venezuela).

The worldwide increase in food prices is an issue that concerns us all. To relieve the effect that this has in weaker countries, the IMF is revising a special loan to bring financial aid to the countries that have been affected the most by this increase, as soon as possible.

The seriousness and extent of the situation differs from country to country. Venezuela’s case is one to be concerned about not only because of the foreign pressures on the market prices, but also Chavez’s orders to the government to put even more pressure, a dangerous cocktail and time bomb.

What was Chavez’s idea given the increase on food prices? The answer is simple, price controls, a practice not very different from other neighboring countries. This is the method he used to control prices of a wide variety of other products such as rice and milk, thinking that fixed prices would not affect farm production whatsoever. Does this sound logical to you? What would you have done in farmers’ shoes when the local government decides to fix a price cap on crops as the worldwide prices continue to increase?

The result is written in every basic economy manual; the production has fallen and shortage has taken over the market… Which is something the Chavist’s theory of economics did not contemplate. But that’s not all; this theory also stipulates (most importantly of all) that if producers take back their supply and the market’s demand remains the same, the prices will increase even more.

Local people commonly believe that “Chavez imposes price control to protect the poorer part of the population” However, this situation in price control is what has made the situation worse and has generated greater inflation.

Didn’t Chavez intend to use socialist economical theories to make the distribution of income equal for his people? The answer is yes, but he seems to have forgotten that the greatest threat to the poor is inflation, they are the ones being affected the most by these measures and when the engine hits full speed, their salaries will just not be enough to survive.

Growing inflation is regressive…what does this mean? This can be understood if you compare it to taxes that are used more on those who less have. According to the Central Bank, 45% of the average Venezuelan lower class family’s salary is spent on the purchase of food. So, since the inflationary acceleration is more severe on food products, it is only logical that the poorer families are the most affected.

If inflation in different trades were homogeneous, the lower class would still be the most affected part of the population because they have less coverage capacity compared to higher social classes.

In what situation does Venezuela find itself today? Food prices in the last 12 months have increased in …(take a deep breath)… 41.5% (there is even speculation that this will increase!!). Private estimates show that 15% of Venezuelan families (roughly 4 million people) have an income lower than the basic food basket, and 38% cannot cover the expense of the basic basket.

As inflation soars in Venezuela, Chavez’s popularity is in steep decline, and the situation in this country is unstable day by day. Very few think that Chavez will react in time to turn things around and change his economical policies.

For some it is already too late.

We will meet again tomorrow,

Horacio Pozzo

Please send your comments to paola@latinforme.com

A must read for investors seeking to take advantage of the Brazil’s growth is Gary Scott’s article: Why I Like Brazilian Bonds.

This from Gary: “You can borrow US dollars to make multi currency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.

“You can also buy Brazilian bonds that yield around 11%. For example, earlier this month Jyske Bank offered these two Brazilian government bonds: 1) Brazil 12.5% maturing 2016 yield 10.9%, 2) Brazil 12.5% maturing 2022 yield 11.0%

“If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 a year income on $100,000 invested…or 20% per annum.

“Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.”

Read on to find out the potential downside to investing in Brazilian government bonds and how much risk this investment carries.

Brazil’s currency, the real, makes sense for multi currency diversification because Latin America is the fastest growing emerging region.

— Advertisement —

Laugh at the falling dollar

Years ago, a young financial trader saw first-hand what happened when the dollar got unhinged from gold or anything else of real value. But he didn’t turn his back on currencies…he developed a method that he used to make him millions. It’s a method he can teach to you…click here to find out how.

*********************************************************************

You can borrow U.S. dollars to make multi currency investments from Jyske Bank at rates a bit above and below 4.5% depending on the amount borrowed.

You can also buy Brazilian bonds that yield around 11%.

For example, earlier this month Jyske Bank offered these two Brazilian government bonds:

* Brazil 12.5% maturing 2016 yield 10.9%

* Brazil 12.5% maturing 2022 yield 11.0%

If you invest $100,000 (the minimum for a leveraged account) and borrow $100,000 at 4.5%, investing both the loan and original investment in Brazil, with $100,000 in each of these bonds…your average return after fees will be about 10%. That works out to $20,000 a year income on $100,000 invested…or 20% per annum.

Plus, the Brazilian currency has appreciated enormously versus the U.S. dollar. This could add an extra profit.

Yes, there is risk. The U.S. dollar/real rate could also create a loss.

For example, in the last year, the dollar has dropped versus the real until March. Now the dollar is having a mild recovery. Had you made the investment above in March, you would have experienced some downward pressure on your loan.

Plus, there is always the risk that interest rates could rise, which will reduce the value of the bonds. Brazil’s investment rating could fall. Dollar interest rates can rise. Any of these events would reduce profits and could even create a loss.

These risks are why you should never leverage to invest in currencies more than you can afford to lose.

On the other hand, compare the risk premium. The leveraged Brazilian bonds pay you 20% per annum to take this risk.

But there is risk in holding any investment. The investment that is deemed the safest in the world, U.S. Treasury bonds, has risk. Inflation can (and has for the past 40 years) chew the bond’s purchasing power to pieces.

On the same day that the Brazil bonds paid 11%, the 10-year U.S. bond paid 3.59%.

Add this up for ten years. The Brazilian bonds pay you 20% per annum–that’s 200% over ten years. The Treasury bonds pay 3.59% or 35.9% in total.

Are the Brazilian bonds that risky, we must ask?

The overall picture is not quite this simple but these numbers reflect the general idea.

There are ways to make this type of investing safer such as borrowing more than one currency and/or investing in more than one type of bond. For example, a yen and dollar loan invested in Russian, Turkish, Brazilian, Indonesian, and South African bonds spreads the risk and increases the risk premium.

Gary Scott
For International Living

Editor’s Note: Gary Scott, long-time friend of IL, has been analyzing and writing about global investments for more than 30 years. His multi-currency education service which you can buy today for a dollar teaches individuals how to create their own global, value-oriented investment portfolio that can take advantage of opportunities U.S. investors are often unaware of. Gary will explore this in more detail when he speaks at International Living’s “Ultimate Event” in Cancun, Mexico, May 28-31.

You can hardly find a seat at the best restaurants in the capital, Caracas, these days. They’re always packed… the art galleries are rammed … and the whisky importers have never had it so good. ..

Out on the streets there are so many luxury 4×4s on the road you could almost be in Chelsea! No doubt about it, Venezuela’s economy is booming.

And I’d like to show you how to position yourself to profit from it!

My next Profit Hunter recommendation is a clever way serious investors could profit from this boom.

More on that in a moment. First, let me explain why Venezuela is the fastest growing major economy in Latin America…

Why I believe the boom has a long, long way to go

It grew by 8% last year and 10.3% in each of the two years before… and by 18.4% the year before that…

That’s the kind of growth you can expect when you are the world’s sixth biggest oil exporter and the price of oil just keeps hitting new highs.

Here at Profit Hunter, I’ve long emphasised we are now in the era of $100 oil. And in fact, by some measures, Venezuela is sitting on top of more oil than Saudi Arabia.

It’s just one reason why the boom in Venezuela still has a long, way to go.

You see, it isn’t just a small group of people who are benefiting from all this new money. According to the IMF, the average Venezuelan should have an income of $10,169 this year. That’s up from $5,427 just three years ago. And it makes them richer than the Brazilians, the Argentineans, the Chileans and the Mexicans – the countries that get all the attention from international investors.

Venezuela ’s share market offers good value as well…

The Venezuela Stock Exchange Index is trading at a price to earnings ratio of less than five and it’s yielding about 9%. Yet most of the big international investors have been afraid of going in!

Of course you can’t blame them. The international media has been focussed on Chavez’s nationalisation of some of the big foreign-owned companies’ assets in the country.

But the truth is Chavez hasn’t been as bad for business as he sounds. The signs of new money that you see everywhere don’t quite gel with Chavez’s socialist rhetoric.

Just listen to his former chief of staff, retired general Alberto Rojas…

In an interview with The Economist last year Rojas explained that “some of Chávez’s speeches are for the gallery… and I’ll give you an example: the attack on the bourgeoisie.”

Chavez may have declared that being rich is bad, but Rojas pointed out that banks, “the most extreme expression of the bourgeoisie”, have actually been “the most favoured sector” of the economy since Chávez swept into power in 1999.

So much for all his bombast about the need for “petroleum socialism”!

A real undervalued gem

Don’t get me wrong though…

Venezuela isn’t some paragon of capitalism waiting to be discovered by intrepid investors. A lot of the new money has ended up with people with close political connections to the regime. They call them the “boligarchs” after Chavez’s “Bolivarian Revolution”, which named for the country’s independence hero .

But there IS good money to be made in Venezuela if you know what you’re doing.

And the exclusive report I’m preparing for Profit Hunter members reveals a groundbreaking company that knows EXACTLY what it’s doing.

It’s a real undervalued gem that’s slipped under-the-radar of the wider investment community.

If you’d like to take trial membership to my service you’ll see that this company hasn’t put all its eggs in one basket. It has big operations in Venezuela and its profiting from its growing wealth. But it operates in other fast growing markets as well.

I’m working on this report right now, but all the details will be with members very soon. So if you’d like to sign-up, click here now. You’ll get another great opportunity to act on right away on doing.

The money really is flowing east. Now’s the time to act!

Regards,

Manraaj Singh
Editor Profit Hunter

And while some of the more-timid investors are already retreating from the region, the actual panic some are experiencing is premature, as Latin American economies are demonstrating a much stronger ter resilience than they’ve been given credit for.

A report from the International Monetary Fund, released Friday, noted that “the region’s banking systems have so far remained largely immune to the financial stresses in the United States,” but financial conditions are “beginning to show some signs of tightening.” Ultimately, the IMF expects the turmoil in the United States to start catching up with Latin America.

U.S. economic growth is expected to fall to 0.5% this year and be just 0.6% in 2009. The IMF sees growth in Latin America slowing as a result. After regional growth hit 5.6% last year (2007), the IMF thinks growth will fall to 4.4% this year and 3.6% in 2009.

History supports the IMF’s position. An economic slowdown – or worse, a recession in the United States – was once the death knell for Latin American economies, which rely heavily on America as a market for their exports. When the United States, the leading importer of Latin American goods, struggled through a recession in 2002, six of Latin America’s most prominent currencies dropped by 20% or more.

But the story for 2008 has been very different.

Brazil’s currency, the real, hit a nine-year high Friday, climbing 0.3% to 1.6577 per dollar, Bloomberg News reported. Earlier, the currency touched 1.6530, its strongest showing since May 1999. The real has gained about 23% over the past 12 months, the best performance among the 16 most-frequently traded currencies tracked by Bloomberg.

The Colombian peso has jumped more than 17% over the last 12 months, reaching 1,792 versus the dollar. It’s now trading at its highest level since July 1999, as foreign investment has rushed into the Andean country. Colombia’s economy expanded 7.5% in 2007, the fastest pace since 1978. Foreign direct investment (FDI) rose 40% last year, reaching $9.03 billion. In the year through March 19, it had increased 25% to $2.16 billion, according to the central bank.

“I would be very critical of the IMF,” said Money Morning Contributing Editor Horacio R. Marquez, an emerging-markets specialist and Argentine native. “The IMF said growth in China was going to slow down in response to the U.S. and you saw its first quarter.”
China’s economy expanded by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year, and the worst ice storm the country had seen in decades.

Marquez also pointed out that Latin American economies have been bolstered by huge trade surpluses – a lingering result of the commodities boom. Countries like Chile, Brazil, and even Mexico are sitting on huge caches of foreign reserves that will offer substantial support should conditions in the U.S. continue to deteriorate.

Emerging markets have an estimated total of $4.1 trillion in central bank reserves, The Wall Street Journal reported. That includes a cushion of $185 billion in Brazil, $49 billion in Argentina and $80 billion in Mexico.

“This time, we have something of a vaccine when the U.S. sneezes,” said Claudio X. Gonzalez, chairman of Kimberly-Clark de Mexico SA.
Mexico’s economy expanded by an unexpected 3.8% in the fourth quarter, as U.S. growth slowed to a paltry 0.6%.

“This is going to be the first time in many years in which Mexico is going to move in the opposite direction as the U.S. business cycle,” Alfredo Coutino, senior economist for Latin America at Moody’s Economy.com (MCO), told Bloomberg in an interview.

Latin America’s New Best Friend

Even as Latin America’s trade with the United States slows down, China has been quick to grab the baton and pick up the import-export slack with the Latin American region.

Trade between China and Latin America surpassed $100 billion last year, a milestone the Chinese government didn’t expect to reach until 2010. Commerce between the two regions totaled $102.6 billion in 2007, a 46% increase from 2006, according to Chinese government data.

Brazil sent 6.7% of its goods to China last year, double the level of 2001. Chile, Peru and Argentina exported to China twice what they imported from their Asian trade partner. Mexico exported $3.2 billion worth of goods to China last year.

Speaking to bankers in Acapulco last month, Mexican President Felipe Calderon touted last year’s increase in his country’s exports to non-U.S. markets: Goods sent to the Middle East increased 48%, while goods shipped to Europe jumped 30% and those to Asia rose 25%.

The United States now absorbs less than 20% of the exports coming out of Brazil, Argentina, Chile and Peru.

Brazil President Luiz Inacio Lula da Silva predicted that his country’s economy would grow at least 5% annually through 2010.

“People are buying more and exports are growing because we don’t depend on the United States, and Europe alone,” he said. “Now we’re exporting to many more countries around the world, and this leaves us calm in the face of an American crisis.”

The government of Brazil recently made plans to establish a permanent commercial center in the United Arab Emirates to promote investment between the regions. The U.A.E. is home to the Abu Dhabi Investment Authority, or ADIA, a sovereign wealth fund with an estimated $875 billion in assets. Brazil is the world’s sixth-largest economy and home to an internal market of approximately 190 million consumers.

The new center will serve as a permanent exhibition of products from Brazil and Latin America, and tap developing investment and marketing opportunities between the regions.

It will also enhance Arab-Brazilian relations through the presence of future Gulf investments in Brazil, Ahmed Yassine, president of the Trade Exterior Chamber of Brazilian-Arabian Gulf and North Africa, told the Emirates News Agency. Yassine led a delegation of Brazilian businessmen on a tour of the region.

“An estimated 20 million people of Arab origin live in Latin America and 7 million of them are in Brazil,” Yassine said.
In 2007, Gulf countries imported $4.6 billion in goods from Brazil, an increase of 4.8% from 2006.

The amount of the region’s debt denominated in foreign currencies fell to 24.7% of gross domestic product in 2007, down from 44.1% in 2002, according to the International Monetary Fund.

Once again, politics are getting in the way of running the nation’s businesses. I will give you one guess which party is behind the shenanigans. Yep, it is Nancy Pelosi and her business-hating Democrats.

Apparently, their only political goal is to not allow anybody to get rich until the nation is free from poverty, a trip to the doctor is free, and every person (whether they are willing to work or not) makes the same middle-class income.

As long as Pelosi has control of the big chair in the House, you might as well hang up your goals of becoming a rich businessman. In her eyes, profits are something you can only get if you steal from your neighbor.

Colombia has poor people too

By now, you must have heard of President Bush’s goal of lowering trade barriers with Colombia. With the possibility of being a key ally in Latin America, his administration wants to ensure free trade and continued economic cooperation.

Rational thinkers see there are very few ways, if any, this deal could hurt Americans. But Pelosi and her left-leaning posse are not known for their rational thinking.

Nope, they see this as a political opportunity to stand up for the little guy. You know the guy I am talking about. He has no education, four kids, does not like the way work makes him feel, and has a killer HDTV setup. Until the American taxpayer buys him a pain-free life (and he is locked in as a Democratic voter), international policy is on hold.

Pelosi says she opposes the free-trade deal with Colombia because of the way the country treats its union leaders. They tend to get killed.

I can understand why she feels that is a bad action to support. But has anybody wondered if those labor groups would have to fight less if we let natural economic laws run their course? If free trade were allowed with Colombia, those union leaders would not have time to fight. They would be too busy working.

Vote the “right” way

Let’s face it. In November, we have a very big decision to make. To the right, we could go with a pro-business, free-market protecting leader. And to the left, we could go with a pro-citizen, big-government kind of leader.

For decades, maybe even centuries, most economists have understood that money is best (most efficiently) spent by companies. After all, they have limited funds and a bottom line to protect. Governments, on the other hand, have the ability to continuously raise their revenues and have no profit margins to worry about. So why would they care about efficiency? It isn’t their money.

That is exactly why the Government Accountability Office just announced more than 40% of all federal credit card spending during a 15-month investigation period was unauthorized of fraudulent. Your hard-earned tax dollars were spent on things like custom suits, massages (no comments Mr. Spitzer), and even lingerie.

In all, it adds up to $14 billion of our money flushed down a golden toilet.

This figure tells us that nearly 40% of our tax dollars are being wasted. How many houses would not be in foreclosure, or how many people would be able to pay their health insurance bills, or how many kids could go to college if that money stayed in the hands of the folks that earned it?

If we want the American economy to rebound and be successful, we cannot raise more trade barriers. We need to eliminate them and let natural economic laws work. Even more importantly, we need to limit the size of our government and keep the nation’s money in the hands that earned it.

So Ms. Pelosi, I hope you kept the receipts for that lingerie. We want our money back.