Lately, Brazil’s currency, the real, has been popping up on my radar screen. For instance, this past week it had its biggest weekly advance in about two months.
Traders and investors alike are starting to come to the conclusion that the worst is over. This can be seen from the VIX, which measures market volatility in the S&P 500.
It can also be seen in the recovery of the latest fundamental data over the last three to four months, in the United States and abroad. It can also be seen by watching investor sentiment readings and seeing how investors are starting to position their money lately.
After all, you’re only going to invest in the riskier assets that have the potential to bring you more money if you feel that the worst is over.
Investors are beginning to come out of their caves and invest once again in riskier assets like stocks, commodities, and emerging market currencies, rather than just CDs, U.S. bonds, and the U.S. dollar.
Investors vote with their money. Whatever they lay money down on, you know they believe in. This is what has caused the real to jump 3.6 percent this past week and 20 percent this year. In fact, Brazil’s real has been the best performer now, of the top 16 currencies of the world.
So that tells me that investors are willing to take risks once again for above average returns and that they feel the worst is behind for the global economy.
If they are right, then emerging markets will flourish as money goes out on the risk curve once again. Personally, I do believe they are right to pour into currencies like the Brazilian real in a time like this.
I believe that we are past the trough of the recession and headed on our way out. If I’m right, then that’s one of the best places to be.
I couldn’t help but notice important signs like: weekly unemployment claims in the U.S. have been falling off overall, finally, since the week of April 2. Now these numbers are at the lowest point since January. While we’ve still got a ways to go, that’s a start and a notable improvement.
A myth is that investors wait until the economy has recovered before investing new money and driving up stocks and currencies. However, history disproves this myth. Investors actually start investing in stocks and riskier currencies about three to six months before their economies recover.
What else makes me think that we’re turning the corner? Industrial output continues to shrink less than forecast. So far, in June, it was the smallest decrease in eight months.
So, yes, there are still declines, but they are getting smaller and smaller all the time. Since most reports are anywhere from a month to a quarter behind the present economic activity, I think we’re past the trough of the U.S. recession which means we’re probably past the trough of the global recession since we mainly need a recovering U.S. to have a recovering world.
Also, China is already recovering and causing the global economy to hold up better than it would have if they’d not already been on the rise.
It’s very possible that China could lead us out of the global recession, but if not, the United States will join them shortly and aid greatly towards this effort.
Already, retail sales have started to pick up since May in Brazil. This is only reinforcing investor sentiment in thinking they are taking the right course of action. Their sales rose a full 4 percent in May from the same month a year earlier. Also, there was an upward revision of the sales numbers in April.
So this encourages even more hope in the recovery of Brazil’s economy.
Therefore, I think that the optimism about a faster-than-expected recovery for Brazil’s economy will only stoke the fire under the real and take it much higher in the months-to-year ahead.
Brazil is a commodity-rich nation that has a lot of money in international reserves. Therefore, I think that investors will take great confidence in investing in this country.
Remember, as economies recover, they will need Brazil’s commodities in order to expand their own economies. This means an improved growth rate coming for Brazil which will only further improve the sentiment and investment in their real.
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