Global investors are pumping so much money into Latin America the region could enter a new boom and bust cycle, with policymakers from Brazil to Mexico on the lookout for bubbles in their markets and economies.
In Sao Paulo's posh residential district of Morumbi, cranes crowd the sky and young women in neon-bright track suits advertise luxury apartments. Real estate lending in Brazil rose 46 percent in August from a year earlier, and the boom is accelerating despite interest rate hikes by the central bank.
Yields on Mexican long-term bonds have plunged to record lows, with foreign investors more concerned about a quick buck than taking full account of future growth and inflation, says BBVA Bancomer debt strategist Ociel Hernandez.
In Colombia, analysts said demand from abroad might be whipping up froth in the country's stock market.
Fueling the torrent of cash, the U.S. Federal Reserve has already bought $1.7 trillion in bonds to try to support America's weak economy. Investors are sinking much of the new money into emerging markets, pumping up companies and credit markets.
"The Fed is essentially exporting bubbles, and over time Mexico and countries across the region are going to have very severe consequences," said Enrique Alvarez, who heads Latin American research at IDEAglobal in New York.
Latin America will absorb a record $90 billion from abroad this year in its stock and bond markets, up from $82 billion in 2009, according to estimates by the World Bank.
Bubbles, or asset price booms which cannot be explained by fundamentals, are notoriously hard to spot, but both Mexico's finance minister and Brazil's central bank president have warned they could be forming.
"We will be very watchful in case we start to see a lot of this money getting channeled into the Mexican economy," Mexican Finance Minister Ernesto Cordero said last week.
But even if countries spot something awry, trying to prick a bubble by raising interest rates might not work because higher rates could draw more investment.
"Monetary policy in its traditional sense is impotent," said London-based Capital Economics economist Neil Shearing.
Raising taxes on foreign bond purchases in Brazil barely dented the soaring real, and Mexico, seeing such steps as risky, said it would rather cut rates to stem inflows.
In Brazil, 2010 is expected to be a landmark year for foreign investment in the real estate sector.
When prices rise, people increasingly talk about flipping properties as they did during the U.S. housing boom. About a two-hour drive from Sao Paulo in Sao Jose dos Campos, a group of 30-somethings argued about bathroom tiles in a bar. They all bought land in the area and are building homes to sell for a quick profit.
"It's much easier to get credit here nowadays," says Andrea, a 30-year-old dentist.
SMELLS LIKE A BUBBLE
Foreign capital flows in 2009 and 2010 will likely be Latin America's highest for any two-year period since 1993-1994, according to the World Bank.
That time around, the boom in foreign investment immediately preceded currency crises in Mexico and Argentina after inflows reversed.
"It feels like a bubble, it smells like a bubble and it probably is," RBS said in a report on emerging market inflows.
Latin America has a history of booms and busts. A surge in bank lending preceded the Latin American debt crisis of the 1980s, in which Mexico defaulted.
Investors nowadays consider the region a star student of past crises.
Government debt levels are relatively low and financial regulations were tough enough for Latin America to avoid big banking troubles during the recent global recession.
But a chief risk now is that investors might be so desperate for yield they could dish money out irrationally.
Last month, Mexico became the first Latin American country ever to sell a 100-year global bond, locking in an interest rate of just 6.1 percent.
The sale came despite declining oil output, a decade of congressional deadlock over economic reforms and a spiraling drug war many companies see as a long-term threat to stability.
BBVA's Hernandez warned that an unexpected change in risk appetite could lead long-term bond prices to plunge.
"These massive flows are setting up a correction that could be much faster than the market might expect," he said.
Shearing says policymakers can only hope to contain bubbles by using banking regulations to keep froth in financial markets and out of the wider economy. As capital inflows effectively boost the money supply, governments can also tighten budgets to clamp down on growth, he said.
"(But) some form of asset price bubble is inevitable over the next three or four years," he said.
In Sao Paulo's Morumbi district, a 36-year-old engineer named Alexandre checked in on the construction of the penthouse he signed up for in July.
"You want to see what it's worth now?" a grinning sales assistant said, handing him an updated price list. In about three months, the apartment's value shot up nearly $60,000.
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