Why interest rate cycles matter, a LOT!

Summarized version for now, I'll try to enhance it more in the future:  Increasing or high interest rate phase: Costs for corporate investments go up or are higher reducing their IRR, increasing payback periods, or just making them unprofitable a lot of corporate investments get shelved during a period of high interest rates Costs to buy house go up Higher interest rates = Higher monthly payments Higher revenue required to buy a house of same price Lower home affordability Less houses built, or lower priced houses built due to market conditions Lower demand drives down house prices Borrowing costs to invest in stock market go up Lower demand decreases stock prices Fixed income markets become more interesting than stock markets Less risk, guaranteed returns Stock prices go down Options pricing…

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Watch out for reductions in the foreign reserves by the Government

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While it is true that the Brazilian Government has only a very small amount of debt issues in dollars, states, cities and companies have a lot of dollar denominated debt. The dollar reserves, even unused, have more of a psychological effect, a certain assurance that the country in general would find dollars if it needed to. Venda de reservas está no cardápio para redução da dívida, mas decisão é do BC, diz Waldery Reducing the reserves is bad news, unnecessary, and quite frankly, very dumb. It shows the Central Bank does not understand how their own money works, and that the government can issue any amount of money it needs to pay its Real denominated debt. To ignore that is downright stupid, and very, very worrying. Just the fact that…

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The Brazilian Central Bank and the Dollar swaps

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This is an example of Big Government that no one (read: rich people) complains about. The Dollar/Real exchanges are done between banks in Brazil, and as such it is a small market. If the government didn't intervene with these swaps the exchange rate would be unpredictably insane. It is not really "losing" money, its just acting as a market maker for future Dollar purchases. In terms of the values on the date the swap was created, the Central Bank has the same amount of money it started with, the "loss" is calculated because the Dollar changed value as time passed. BC tem ganho de R$ 17,733 bi com swaps cambiais nas duas primeiras semanas de novembro Sometimes someone will complain that the Government is manipulating the exchange rates, but that…

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Read more about the article Links of the Weakly News – November 9th+
Nothing to see here, the economy is fine...

Links of the Weakly News – November 9th+

Brasil deve deixar ranking das 10 maiores economias do mundo That is something Guedes does not seem to think is a problem. He thinks its ok for the exchange rate to have dropped pretty much non-stop since Bolsonaro took over. I guess its ok if you are a banker and put all your bets on this happening, but for the rest of the population, including Bolsonaro supporters who love going to Miami, this is not ok. The dollar going up, on purpose, is what is causing the current inflation. There is currently no policy in place to revert this, so I am personally betting on continued deterioration of the Real. Can anyone tell me where are the magical investors that Guedes is waiting for to come and save the country?…

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Links of the Weakly News

I collected several articles this week that exemplify the incorrect reasoning that is endemic in the Brazilian news when it comes to how the economy works and/or what it needs. This bad math/logic is what is killing the economy. The trick is to learn how it is killing the economy and bet timely against it to win... Governo tenta votar projeto que abre caminho para conta em dólar no Brasil Who is this for? The rich. If you read the article you notice that they think this was something important to pass now. I would think so too, they are destroying the currency, it is damn well important if you are rich to get your wealth out of the Real! The poor, on the other hand, well, they are just…

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On Hyper-Inflation

Hyper-Inflation. Scary stuff. Most 40+ people in Brazil know what that means, and what life is like in that scenario. How likely is it that it will return? How likely is it that it would have happened had the PT party stayed in power? How likely is it now that a right-wingish party is in power? All good questions. Here is an attempt at answering them: 1) Very likely. Brazil has a right-wing party but its populist, so it has a tendency to spend money to please the populace, while being dumb and believing that the government has a spending limit, and that spending generates inflation no-matter-what. So it is on a suicidal path by destroying supply, either through currency devaluations or demand suppression, all under the religious belief that…

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Second post

I am just going to write something here to get started and break the ice, get over the first real post "writer's block". I have been watching Brazil deteriorate from a safe distance for some time now. Outdated and ineffective orthodox principles are being used to determine policy and its killing the economy, the population, and everyone's future. Its as if the tribal bullies got together and decided to make everyone drink poison to attract good spirits. The tribal bullies being the opinion makers and powerful actors, the poison is the suicidal economic policies, and the good spirits are the "investors" (both imaginary beings). I don't know where or how this will end, but I see no reason why it will end well. It will take something drastic to turn…

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