Category: Uncategorized

 

As the world economy moves away from the globalization of manufacturing value chains and finance, the protection of domestic markets is back in favor with policymakers. However, the neo-mercantilists will have to overcome high costs, including overvalued currencies.

The case of TSMC’s investment in a new $40 billion semiconductor plant in Arizona is illustrative. The Taiwanese chipmaker gave in to pressure from the Biden Administration and agreed to build a “fab” in Arizona, but it does not seem to be happy about it. The company has complained about “exorbitant costs, unmanageable workers… and a lack of local expertise,” and it has repeatedly delayed the project and asked for more subsidies from Washington.

TSMC’s preference for manufacturing at home is not surprising. Taiwan is a model of successful mercantilist policies (repression of wages, directed credit, and a stable and highly competitive currency) that create fruitful conditions for manufacturing exports. Taiwan, and other Asian “tigers,” including China, carefully manage their currencies to assure export competitiveness. The U.S., on the other hand, has long favored consumers over manufacturers and has an overvalued currency, which serves as the safe haven asset for the rest of the world. Manufacturing powerhouses are all commodity poor, which facilitates currency management, while the U.S. is commodity-rich, which subjects it to repeated commodity boom-to-bust cycles. The latest of these often violent commodity cycles in the U.S. – the massive boost in shale oil and gas output from Texas’s Permian Basin – has been an important source of strength for the U.S. dollar over the past decade.

We can see the challenges faced by the U.S. and other aspiring mercantilists by looking at current and historical relative exchange rates. Below, we show the Real Effective Exchange Rate (REER) for the U.S., which measures the value of the dollar relative to the currencies of trading partners. The REER is at near-record levels for the U.S., the result of the shale oil boom, rising geopolitical risk, and a long period of economic “American Exceptionalism” marked by relatively higher GDP growth and the stock market success of America’s magnificent technology titans.

The chart below shows REERs for a sample of developed and emerging countries relative to their long-term histories (1987-2024), telling the same story. We can highlight the competitiveness of “producer” countries (Germany, Japan, Thailand, Malaysia, and Turkey) compared to “consumer” countries (e.g., the U.S., Australia, New Zealand). China and Vietnam have appreciated from very low levels but are not likely to let their currencies appreciate more in the future. Eastern European countries have lost competitiveness over this period but are unlikely to be allowed to manage their currencies downwards. The recent appreciation of the Mexican peso is probably explained by hot money flows exploiting currently high interest rates.

We look below at the annual volatility of currencies over this period. We highlight the stability of champion exporters of manufactured goods like Germany, Korea, Taiwan, Singapore, Mexico, and Malaysia.

The Big Mac Index ranking from The Economist Magazine is another good measure of the overall cost for businesses to operate in an economy, as it reflects costs from the farm, manufacturing and service sectors, including taxes and regulations. In the chart below, “producers” — countries with an established vocation for manufacturing exports — are labeled in green, while commodity producers that rely more on manufactured imports are labeled in bold black. The chart compares three data points — January 2024, 2020 pre-COVID, 2010, and 2000. We can see that across these periods exporters of manufactured goods generally have cheap Big Macs and importers have expensive Big Macs. The exemptions can be explained by either periods of excessive political turmoil and capital flight (South Africa, Argentina) or cycle-low commodity prices (2000). Mexico and Turkey, two countries that play a fundamental role in the manufacturing value chain for their respective regions, do not manage their currencies as well as the Asian “tigers.” Both suffer from more macro-economic instability than their Asian counterparts. The near-doubling of the price of the Big Mac in Mexico since 2020 is a cause for concern. In this regard, Poland is also apparently losing competitiveness in the European market. Contrast this with Taiwan’s remarkable ability to keep prices near the bottom of the table.

Brazil and the United States, two countries now enthusiastically pursuing neo-mercantilist agendas, are interesting cases with similarities. Both have severely deindustrialized while at the same time expanding energy production aggressively. Both went from being large importers of oil to self-sufficiency since 2010, which, all else being equal, should translate into stronger currencies. The implication is that neo-mercantilist policies may be pursued at a high cost, without the luxury of a weak currency.

The irony is that commodity prices are likely to remain high in the 2020s because of a more inflationary environment and production bottlenecks. This would mean stronger currencies for commodity producers and even higher costs to implement reindustrialization policies. The “commodity curse” is difficult to shed.

 

 

 

 

 

 

 

 

Emerging market stocks underperformed the S&P500 in 2023, for the sixth year in a row and the ninth  out of the last ten years. This leaves the valuation premium of the S&P500 at its highest level since the peak of the previous tech bubble in 2000. The U.S. market appears to be enjoying a blow-off, driven by a consensual view on an immaculate soft-landing for the U.S. economy and optimism on future AI-fueled productivity growth.

The chart below illustrates the current expected returns for EM markets and the S&P500, based on a CAPE ratio analysis. The Cyclically Adjusted Price-Earnings Ratio (CAPE) is calculated using the average of inflation-adjusted earnings for the past ten years, which helps to smooth out earnings’ cyclicality. This tool is particularly useful for highly cyclical assets like EM stocks and has a long history of use among investors, gaining popularity through Professor Robert Shiller at Yale University. We employ dollarized data to capture currency trends. The seven-year expected returns are calculated assuming that each country’s CAPE ratio will revert to its historical average over the period. Earnings are adjusted according to each country’s current position in the business cycle and are assumed to grow in line with nominal GDP projections from the IMF’s World Economic Outlook (IMF WEO, October 2023).

As expected, countries with “cheap” CAPE ratios below their historical average tend to have higher expected returns than those considered “expensive” with CAPE ratios above their historical average. These expected returns are based on two significant assumptions: first, that the current level of CAPE relative to the historical level is not justified; second, that market forces will correct the current discrepancy.

Historical data strongly supports the second assumption when considering seven-to-ten-year periods but not in the short term (one to three years).

Nevertheless, during certain periods when “cheap” markets on a CAPE basis exhibit short-term outperformance, investors should take note, as the combination of value and momentum can be compelling. As depicted in the chart below, we are currently in such a period. Over the past twelve months, holding the “cheapest markets” has generated alpha in an EM portfolio. The chart shows markets from left to right based on how cheap they appeared a year-end 2022. By and large, cheap paid and expensive did not, with the U.S. and India being the two outliers, both going from very expensive to even more expensive.

For 2024, Turkey, Taiwan and the Philippines look compelling. In addition to being “cheap,” their economies are in the early phase of the business cycle and earnings are expected to be strong.

The fact that cheap markets are now performing well is encouraging for EM investors. However, rising geopolitical tension and slow growth do not create a conducive investment environment. As always, a strengthening dollar signals the need to stay invested in dollar-denominated quality assets.

Lula’s speech in Salvador inauguration of Aeronautic Institute, in defense of a big activist welfare state working in benefit of the people and against the reactionary elites.

“I don’t know if you noticed that, after listening to everyone speak, it would be unnecessary to make speeches here about the Aerospace Technological Park of Bahia. But I think this is the first time I visit Bahia in 2024. And I wanted to tell you that visiting the states of the Federation will be a routine for me from now on. Unlike Jerônimo, who inherited a well-planted farm, with prepared seeds, meaning fertilizer already placed in the soil, and he is in the first year only harvesting what has been planted over the years.

I inherited a country devastated by a locust plague that destroyed almost everything we had done in thirteen years of government. I don’t know if you noticed that we no longer had the Ministry of Culture, we no longer had the Ministry of Fisheries. We never had a Ministry for Indigenous Peoples.

We not only eliminated Ministries, but we also ended public policies. Just so you have an idea, Jerônimo, it had been almost 7 years since there was a raise in the school lunch for 47 million children in this country.

Luciana knows, Luciana knows that in just one year, she had to invest much more in Science and Technology, in scholarship payments, than had been done in the previous 4 years because practically any possibility of investment in this country had been destroyed.

And what worries me is that a country the size of Brazil, with the quality of the Brazilian people and the size of the Brazilian people’s dream, cannot live on lies. We cannot live on recklessness, we cannot live on provocations, we cannot live on fake news, as if it were a 24-hour lie industry in this country.

This country needs to give itself a chance. This country is too big to be treated as if it were a small country. This country has extraordinary potential, and we have proven that twice. This country could have been recognized as the fifth-largest economy in the world long ago. But there are many people in this country who insist on regressing.

What have they done to our Petrobras? The privatization of Eletrobras. The privatization of Eletrobras, people don’t like it to be mentioned, but it was a mockery in this country in a strategic sector like the energy sector.

I am indignant because just last night I had a meeting of almost two hours with comrade Haddad discussing the economic future of this country, the perspective of what is happening in the world. And I want to tell you that I am more optimistic today than I was during the campaign, Wagner. I am much more optimistic. Because I think that we, who have taken on the role of governing an important state like Bahia, an important municipality, or an important country, cannot say that things cannot be done; we cannot say that we cannot do things.

What we need is the courage to assume our role. This country will never be the country we want if we do not consider that we need to improve the quality of life of 80% of the Brazilian population, that we need to improve the minimum wage, that the poorest people need the right and opportunity to study and work. We want to create a society of middle-class standards.

I don’t want a society with someone sleeping on the street, in the gutter, with people begging for soup at the end of the week at the city hall door. This is not the country we want. The country we want is one where everyone has equal opportunities, a chance to study, a chance to work, and take care of their lives. And we will not build this country if we are not stubborn. If we kept discussing whether we could do things, we wouldn’t do them.

So I wanted to tell you that I came here to announce the launch of an Aerospace Technological Park, and it’s not just anything. It’s important to understand, my dear Deputy Pastor Isidório, with your famous bible in hand. It is necessary to understand that we were placed in the world to persist, not to accept anything as impossible. The only thing impossible in the world is God sinning; everything else we can do, and we can do a lot. And this PAC, Jerônimo, this PAC has to be executed.

You saw what happened in Rio de Janeiro with the flood. And when any flood happens, the first response is always from the Federal Government. And people always need the Federal Government, and the Federal Government has to help.

But analyzing what happened in Rio de Janeiro, we realized that since 2013, there are several contracted works to take care of hills and streams that were not used. Most of the works were not done. Many works are only 15%, 20% complete. Only R$ 1 billion out of R$ 1.6 billion was used, and of that one billion, no work was finished, none.

So it is important, Jerônimo, that you inherited this state. You inherited a state administered for 16 years by PT people, by a person of the quality of Wagner and Rui. And you are very clever because what I saw, you have already improved a lot there. From the first speech I saw you make to today, you have already advanced a lot. You have to do more than both of them. What they did is already in the past. You know, Bahia has already used it, Bahia has already enjoyed it, and now you have to have something new.

And that’s why this year is the year of harvest. Last year we dealt with, we took over a country almost destroyed, with thousands of paralyzed projects, from daycare to university. From daycare to school, from UBS to hospitals, all paralyzed. Stubbornly paralyzed because it was not part of the logic of the past government to make this country grow. We decided to make this country grow.

So last year, we planted. We took care of plowing the land, fertilized it, planted the seeds, covered the seeds, and now the weather is good. I know that in the Northeastern sowed land, the weather is not good. The drought is affecting our small and medium producers. I want to say right now not to worry because the Federal Government will help you get out of this predicament. You can bring a piece of the bill to us; we will be partners in the reconstruction of production capacity.

So, this year is a year when I will travel a lot around Brazil. I am leaving here, going to Recife, visiting the refinery that was paralyzed for 14 years. It could already be refining 260 thousand barrels of oil per day, but it isn’t. I am going there to finish that refinery.

After that, I will launch the ITA (Aeronautics Institute) in Ceará. And why ITA in Ceará? For those who don’t know, ITA is located in the city of São José dos Campos, in São Paulo. It is perhaps one of the most important technological institutes we have in Brazil. People educated at ITA, people who graduate from ITA, know. Everyone says, “I’m a graduate engineer from somewhere.” But the ITA guy says, “I’m an engineer graduated from ITA.” Because it is a center of excellence.

And why are we going to do it in Ceará, Jerônimo? Because in Ceará, 40% of the young people who take the entrance exam to go to ITA are from Ceará. So I think we need to pay tribute to the state of Ceará by taking a branch of ITA so that it becomes as great as São Paulo.

And we will travel a lot; we will travel this country. Rest assured, Jerônimo, that if there is the inauguration of a toothpick factory, invite me, because it is necessary to show that good things happen in this country.

Sometimes you sit in front of a television, you almost fall into depression because it seems that nothing good is happening in the country, nothing good is happening in Bahia, nothing good is happening anywhere, despite the work. I want to tell you that I have never worked so much in eight years of presidency as I have this year. Because rebuilding is more difficult than doing something new. And we will rebuild this country.

Dear Alice Portugal, rest assured that you will be proud to have been a deputy again in my term as President of the Republic. And we will make this country grow again. We will make this country generate employment. We will increase the minimum wage. We will improve basic education. We will improve high school education. We will create more universities. And we will create a hundred more federal institutes in this country.

Because I want to prove once again, I apologize to the Brazilian elite, forgive me if this hits close to home, but the Brazilian elite never intended to educate our people. I say this repeatedly. And I will tell you why. This country was discovered in 1500. Spanish America was discovered in 1498, eight years earlier. By 1554, Peru already had its first university. And our first university came in 1920, 420 years after the discovery.

And why did we have the first university called “Universidade Brasil”? It wasn’t because they were worried that Wagner would take an engineering course there. It was because the King of Belgium was coming here. And at that time, the king, to travel, had to receive an honorary doctorate. So they gathered various faculties that Brazil had and created a university.

And I want to know if you know of any country in the world that developed without first investing in education? When will we have a Silicon Valley here in Brazil? How is it possible that China, until recently, had a GDP smaller than Brazil’s? China was a very poor country. What was the revolution that happened in China? First, investment in education. The number of Chinese and engineering students worldwide is much higher than what we have studying here in Brazil.

Because education was never considered essential. I never forget that in the first ministerial meeting of 2003, a minister said there was no money to spend on education. I said, “Look, let’s prohibit the use of the word ‘expense’ in education.” Every time we talk about education, it’s an investment, and investment has an extraordinary return.

So, comrades, I want you to know that this year is the year of harvest. We will harvest many things that we planted. I will travel many times. I will come to Bahia many times. I can’t come during Carnival because during Carnival, I will work. Someone needs to work in Brazil, so I will work. I will work and cannot participate in Carnival.

But the concrete fact is this: I will have to take a trip on the night of the 13th. I am going to Egypt. And from Egypt, I will go to Ethiopia to participate in the African Union Congress because Brazil needs, once and for all, to start repaying the historical debt we have with the African people. Since Brazil is a poor country that cannot pay its debt in money, we pay in the transfer of knowledge, in the transfer of successful public policies, in the transfer of technology. That’s what I want to do because now we are in an exceptional moment.

I want you to pay attention to something that you can hold me accountable for from now on. This country has never had the opportunity to become a great nation as we have now. I will repeat: in 500 years, this country has never had the opportunity to become a great nation as it has now.

Brazil has done an extraordinary thing by recovering its international relations. Today I can tell you that Brazil is again an international protagonist. I can tell you that Brazil is respected in the world again. It’s important to remember that this year we will host the G20 in Brazil. Next year, we will hold it in the state of Pará. And then, next year, I will hold a BRICS meeting here in Brazil.

“And why does Brazil have a chance to grow? Because there’s this thing called, you know, Planet Earth being destroyed by human irresponsibility. In fact, humans are fantastic because they are so creative that they can self-destruct. So what’s the problem? The world needs to make a gigantic effort so that we reduce the possibility of global warming. Those who don’t believe in global warming need to notice the changes in weather conditions in various parts of the world. It’s raining a lot where it didn’t rain. It’s raining little where it always rained a lot. It’s flooding where it never flooded. It’s drying up where it never dried up. Even worldwide, fires in places that were not prone to fires. And all of this is due to global warming. Have you noticed the heat we are experiencing? We have experienced periods where this heat in Brazil was the strongest in the last 100 years. In Europe, the heat reached 40 degrees.

And Brazil has the greatest potential in the world to help solve this problem with so-called renewable energy. This country already has 87% of its electrical energy renewable. No other country in the world has this; we do. But this country has ethanol; this country can have biodiesel; this country can have biomass. This country can produce a thousand types of fuels that other countries cannot.

Furthermore, this country is going to be the largest producer of green hydrogen in the world. And we don’t want to produce hydrogen just to sell. We want to be the major hydrogen producer so that industries come to produce their green products here in Brazil. If we want to reduce emissions and the aggravation of the greenhouse effect, Brazil is a chance. And then there’s the issue of the African continent, which is also an extraordinary opportunity.

That’s why we are very, very interested in discussing this issue of the ecological transition of this country, the climate transition of this country, the energy transition. It’s an opportunity, it’s an opportunity that God is giving us. So, friends, it’s an extraordinary chance.

I know that you are investing a lot in the potential of green hydrogen. I know that other states are investing. Piauí is investing, Ceará is investing, Rio Grande do Norte is investing. And when I talk about Brazil, I’m talking about the Brazilian Northeast as well. It’s a great opportunity in the Northeast. I think that since the Portuguese crown arrived here in Brazil, or since Brazil was discovered, possibly the Northeast has in this half of the 21st century, listen, governor, the chance to have the development potential equal to any state in the country.

The Northeast cannot accept that it was born to be seen by the world as the place with the highest infant mortality, the highest illiteracy, the highest school dropout, the most people receiving Bolsa Família, the most people dying of malnutrition. It’s not the Northeast we want to create, people. It’s not that Northeast. I can tell you from life experience that it costs very little, very little, to invest in the poor of this country and invest in improving their lives.

When we improve people’s lives, you know what will happen? There will be less robbery, less violence. Did you see, Rui, yesterday there was a crime spree in Rio de Janeiro at 3 o’clock in the afternoon? These phenomena that are happening, this abuse of organized crime, this growth of all this, I can say that there are a thousand cases, but the main one is the absence of the Brazilian state in not taking care of people at the right time.

And the right time starts with elementary education. Elementary education has to be a priority. If the child is well educated in the early years, that child will thrive and grow. If they are not well educated, they will have a genetic defect, they will have a defect of origin, and they will not be able to progress.

And you can help build this country. Rui believes a lot in this PPP thing. Let’s see if we can do it in Brazil. Let’s see if we can do it in Brazil, make this country take a leap in quality. Who takes pleasure in seeing people starving on the street? Who takes pleasure in seeing children begging on the street? Who takes pleasure in seeing women with children lying on a sidewalk? And often we pass by and even turn away because it’s ugly? Who is to blame for this? Is it the president? Is it the governor? Is it the mayor? No. It’s us. It’s us, the Brazilian society, who need to raise our heads and take care of this country because it is our responsibility. And may Bahia serve as an example for many things that I will do from now on in this country.

Congratulations to the Aeronautics, congratulations to the Governor, because now you will have an Aerospace Technological Park in Bahia. The name is so beautiful that Jerônimo couldn’t even say it right, “Technological Park.”

And this is what will happen all over Brazil. Get ready, folks, get ready, because I want to have. I have three years in office, and in these three years, I want to dedicate so that you still live in a country where people smile again. Don’t be afraid of violence, don’t sleep on the street, don’t beg for alms.

And then, Wagner, I see you there, we are going to create a special policy for the elderly. This is something that we are going to create. This is something that we are going to create a working group to think carefully because Brazil is becoming an old country. Brazil is having an old population. And not everyone is fortunate enough to be a strong old person like me, like Otto, like Wagner, like José Mucio. Not everyone has a young person at 78 looking like they’re 30.

But I am concerned about creating a working group to present to Brazil a proposal for special attention to people who are getting old and who have no one to take care of them. This is a problem that will arise. So, we have to take care of the child, the teenager. I don’t know if you saw this week, we approved the law, the law was sanctioned that every young person going to high school has a savings account. He will receive, you know, R$ 200 reais per month deposited in a savings account for him. And if he manages to graduate, he can only withdraw the total when he graduates; he can take a little bit during the study. Because the highest school dropout is in high school.

The boys can’t complete the entire course, or they don’t like to do it, or we can’t motivate them. So, we are trying to see if with the scholarship, we can motivate these boys to finish their technical courses, learning a profession. If not, we won’t take a leap in quality.

That’s why, Jerônimo, I’m here happy. I didn’t know it was Rui Costa’s birthday party because if I had known, I would have done it in Brasília last night, but I didn’t know. I want to tell you that I will come here to Bahia other times. This is a state that I have a relationship of love, a very affectionate relationship, not only for the people in this fight but because Bahia represents a lot for this country.

So, comrades from Bahia, I won’t say ‘long live Bahia’ because here I know that the governor cheers for Vitória. I also want to say that I didn’t know about the attachment of the people to Bahia. I also cheer for Vitória. Solidarity. We’re back to Serie A with the goal of being champions this year.

A kiss in the heart, a kiss to all of you, and until our next visit to Bahia. Have a good carnival!”

 

Nice speech by Argentina’s Milei at Davos. Not sure how any of this works in practice, but surely refreshing after 40 years of socialism in Latin America.

Good afternoon, thank you very much. Today I am here to tell you that the West is in danger. It is in danger because those who are supposed to defend Western values are co-opted by a worldview that inexorably leads to socialism and, consequently, to poverty.

Unfortunately, in recent decades, motivated by well-intentioned desires to help others and by the ambition to belong to a privileged caste, the main leaders of the Western world have abandoned the model of freedom for various versions of what we call collectivism.

We are here to tell you that collectivist experiments are never the solution to the problems affecting the citizens of the world; on the contrary, they are the cause. Believe me, no one better than us Argentinians can testify to these two issues.

When we adopted the freedom model around 1860, in 35 years, we became the world’s leading power. However, when we embraced collectivism over the last 100 years, we saw our citizens systematically becoming impoverished, falling to the 140th position globally. But before we can have this discussion, it’s important to look at the data that supports why not only is free-market capitalism a possible system to end world poverty, but it is the only morally desirable system to achieve it.

If we consider the history of economic progress, we can see that from year zero until around 1800, the world’s per capita GDP remained virtually constant throughout the reference period.

If one looks at a graph of economic growth throughout human history, it would resemble an exponential curve, remaining constant for 90% of the time and sharply rising from the 19th century onwards. The only exception to this stagnation occurred in the late 15th century with the discovery of America.

But aside from this exception, between the year zero and 1800, global per capita GDP remained stagnant.

Now, not only did capitalism generate an explosion of wealth since it was adopted as an economic system, but if you analyze the data, you’ll see that growth has been accelerating throughout the entire period.

During the period from 1800 to 1900, the per capita GDP growth rate remained stable at around 0.02 percent annually, almost no growth. From the 19th century with the industrial revolution, the growth rate increased to 0.66 percent. At that rate, it would take 107 years to double per capita GDP.

Now, if we look at the period between 1900 and 1950, the growth rate accelerates to 1.66 percent annually. We no longer need 107 years to double per capita GDP, but 66. And if we take the period from 1950 to the year 2000, we see that the growth rate was 2.1 percent annually, meaning we could double our per capita GDP in just 33 years. This trend, far from stopping, remains alive even today. If we take the period from 2000 to 2023, the growth rate accelerated to 3 percent annually, implying that we could double our per capita GDP in the world in just 23 years.

Now, when studying per capita GDP from 1800 to today, it is observed that, after the industrial revolution, the world’s per capita GDP multiplied by more than 15 times, generating an explosion of wealth that lifted 90 percent of the world’s population out of extreme poverty.

We must never forget that, by the year 1800, about 95 percent of the world’s population lived in extreme poverty; while that number dropped to 5 percent by the year 2020, before the pandemic.

The obvious conclusion is that, far from being the cause of our problems, free-market capitalism, as an economic system, is the only tool we have to end hunger, poverty, and destitution worldwide. The empirical evidence is unquestionable. Therefore, as there is no doubt that free-market capitalism is superior in productive terms, the left-wing doxa has attacked capitalism for its alleged moral shortcomings, claiming it is unjust.

They say that capitalism is bad because it is individualistic, and that collectivism is good because it is altruistic, advocating for “social justice.” But this concept, which has become fashionable in the first world in the last decade, has been a constant in the political discourse in my country for more than 80 years.

The problem is that social justice is not only unjust but also does not contribute to the general well-being. Quite the opposite, it is inherently unjust because it is violent. It is unjust because the state is funded through taxes, and taxes are collected coercively. Can any of us choose not to pay taxes? This means that the state is funded through coercion, and with a higher tax burden, there is more coercion and less freedom.

Those who promote social justice start from the idea that the economy is a pie that can be distributed differently. However, that pie is not given; it is wealth generated in what Kirzner calls a discovery process. If a product is of good quality at an attractive price, it will do well and produce more. Thus, the market is a discovery process in which the capitalist finds the right path on the go.

But if the state punishes the capitalist for being successful and hinders this discovery process, destroys incentives, the consequence is that less will be produced, and the “pie” will be smaller, causing harm to society as a whole.

Collectivism, by inhibiting these discovery processes and hindering the appropriation of what is discovered, ties the hands of the entrepreneur and makes it impossible to produce better goods and offer better services at a better price.

So how is it possible that from academia, international organizations, politics, and economic theory, an economic system that not only lifted 90% of the world’s population out of extreme poverty but does so increasingly faster is demonized, claiming it to be unjust?

Thanks to free-market capitalism, the world is currently in its best moment. There has never been, in the entire history of humanity, a time of greater prosperity than what we live in today.

Today’s world is freer, richer, more peaceful, and more prosperous than at any other time in our history. This is true for everyone but particularly true for those countries that are more free, respect economic freedom, and the property rights of individuals. Because those countries that are more free are eight times richer than the repressed ones; the lowest decile of the distribution of free countries lives better than 90% of the population of repressed countries, has 25 times fewer poor people in the standard format, and 50 times fewer in the extreme format. And as if that were not enough, citizens of free countries live 25% longer than citizens of repressed countries.

Now, to understand what we come to defend, it is important to define what we mean when we talk about libertarianism.

To define it, I take the words of the greatest proponent of freedom in our country, Alberto Benegas Lynch (h), who says: “Libertarianism is the unrestricted respect for the life project of others, based on the principle of non-aggression, in defense of life, liberty, and property of individuals. Its fundamental institutions are private property, free markets free from state intervention, free competition, the division of labor, and social cooperation. Where one can only be successful by serving others with better quality or better-priced goods.”

In other words, the capitalist is a social benefactor who, far from appropriating others’ wealth, contributes to the general well-being. Ultimately, a successful entrepreneur is a hero.

This is the model that we are proposing for the future of Argentina. A model based on the fundamental principles of libertarianism: the defense of life, liberty, and property.

Now, if free-market capitalism and economic freedom have been extraordinary tools to end poverty in the world, and we are currently in the best moment in human history, why do I say that the West is in danger?

I say that the West is in danger precisely because in those countries that should defend the values of the free market, private property, and other libertarian institutions, sectors of the political and economic establishment, some due to errors in their theoretical framework and others due to the ambition for power, are undermining the foundations of libertarianism, opening the doors to socialism, and potentially condemning us to poverty, misery, and stagnation.

Because it must never be forgotten that socialism is always and everywhere an impoverishing phenomenon that failed in all countries where it was attempted. It was a failure economically. It was a failure socially. It was a failure culturally. And it also killed more than 100 million human beings.

The essential problem of the West today is that we must not only confront those who, even after the fall of the wall and overwhelming empirical evidence, continue to advocate for impoverishing socialism, but also our own leaders, thinkers, and academics who, sheltered in a mistaken theoretical framework, undermine the foundations of the system that has given us the most spectacular expansion of wealth and prosperity in our history.

The theoretical framework I refer to is that of neoclassical economic theory, which designs an instrumental that, unintentionally, ends up being functional to state intervention, socialism, and the degradation of society. The problem with neoclassicals is that, as the model they fell in love with does not map to reality, they attribute the error to supposed market failures instead of reviewing the premises of their model.

Under the pretext of a supposed market failure, regulations are introduced that only generate distortions in the price system, hinder economic calculation, and consequently, savings, investment, and growth.

This problem essentially lies in the fact that not even supposedly libertarian economists understand what the market is, because if it were understood, it would quickly be seen that there is no such thing as market failures. The market is not a supply and demand curve on a graph. The market is a mechanism of social cooperation where exchanges occur voluntarily. Therefore, given that definition, market failure is an oxymoron. There is no market failure. If transactions are voluntary, the only context in which there can be market failure is if there is coercion. And the only one with the ability to coerce on a large scale is the state that has a monopoly on violence. Consequently, if someone believes that there is a market failure, I would recommend that they check if there is state intervention in the middle. And if they find that there is no state intervention in the middle, I suggest they analyze it again because it is definitely wrong. Market failures do not exist.

An example of the supposed market failures described by neoclassicals is concentrated structures in the economy. However, without functions that exhibit increasing returns to scale, whose counterpart is the concentrated structures of the economy, we could not explain economic growth from 1800 to today.

Notice how interesting. From 1800 onwards, with the population multiplying more than 8 or 9 times, per capita product grew more than 15 times. There are increasing returns, which led extreme poverty from 95% to 5%. However, the presence of increasing returns implies concentrated structures, what would be called a monopoly. How can something that has generated so much well-being for neoclassical theory be a market failure? Neoclassical economists, think outside the box. When the model fails, don’t get angry with reality, get angry with the model and change it.

The dilemma facing the neoclassical model is that they claim to want to improve the functioning of the market by attacking what they consider failures, but by doing so, they not only open the doors to socialism but also undermine economic growth. For example, regulating monopolies, destroying their profits, and smashing increasing returns would automatically destroy economic growth.

In other words, every time you want to correct a supposed market failure, inevitably, due to not understanding what the market is or falling in love with a failed model, you are opening the doors to socialism and condemning people to poverty.

However, in the face of the theoretical demonstration that state intervention is harmful and the empirical evidence that it failed – because it could not be otherwise – the solution that collectivists will propose is not more freedom but more regulation, generating a downward spiral of regulations until we are all poorer, and everyone’s life depends on a bureaucrat sitting in a luxury office.

Given the resounding failure of collectivist models and the undeniable advances of the free world, socialists were forced to change their agenda. They abandoned the class struggle based on the economic system to replace it with other supposed social conflicts equally harmful to community life and economic growth. The first of these new battles was the ridiculous and unnatural fight between man and woman.

Libertarianism already establishes equality between the sexes. The foundational stone of our creed says that all are created equal, that we all have the same unalienable rights granted by the creator, among which are life, liberty, and property.

The only result of this radical feminist agenda is increased state intervention to hinder the economic process, providing jobs for bureaucrats who contribute nothing to society, whether in the form of women’s ministries or international organizations dedicated to promoting this agenda.

Another conflict that socialists pose is that of man against nature. They argue that humans harm the planet and that it must be protected at all costs, even advocating for population control mechanisms or the bloody agenda of abortion.

Unfortunately, these harmful ideas have strongly permeated our society. Neo-Marxists have managed to co-opt the common sense of the West. They achieved this thanks to the appropriation of the media, culture, universities, and yes, also international organizations.

Fortunately, more and more of us dare to speak out. Because we see that if we do not confront these ideas head-on, the only possible destiny is more state, more regulation, more socialism, more poverty, less freedom, and consequently, a worse quality of life.

The West, unfortunately, has already begun to travel this path. I know it may sound ridiculous to suggest that the West has turned to socialism. But it is only ridiculous to the extent that one restricts oneself to the traditional economic definition of socialism, which establishes that it is an economic system where the state owns the means of production.

This definition should be updated to present circumstances. Today, states do not need to directly control the means of production to control every aspect of individuals’ lives. With tools like monetary issuance, debt, subsidies, interest rate control, price controls, and regulations to correct supposed “market failures,” they can control the destinies of millions of human beings.

This is how we reach the point where, under different names or forms, a good part of the generally accepted political offers in most Western countries are collectivist variants. Whether openly declaring themselves communist, socialist, social-democrats, Christian democrats, neo-Keynesians, progressives, populists, nationalists, or globalists. In essence, there are no substantive differences: all argue that the state must direct all aspects of individuals’ lives. All defend a model contrary to what led humanity to the most spectacular progress in its history.

We come here today to invite other Western countries to return to the path of prosperity. Economic freedom, limited government, and unrestricted respect for private property are essential elements for economic growth.

This phenomenon of impoverishment produced by collectivism is not a fantasy. Nor is it fatalism. It is a reality that Argentinians know very well. Because we have already lived through it. Because, as I said before, since we decided to abandon the model of freedom that had made us rich, we have been trapped in a downward spiral where every day we become poorer.

We have already experienced it. And we are here to warn you about what can happen if Western countries that became rich with the model of freedom continue on this path of servitude.

The Argentine case is the empirical demonstration that no matter how rich you are, how many natural resources you have, no matter how capable the population is, how educated it is, or how many gold bars are in the central bank’s vaults. If measures are adopted that hinder the free functioning of markets, free competition, free price systems, if trade is hindered, if private property is attacked, the only possible destiny is poverty.

In conclusion, I want to leave a message to all the entrepreneurs present here and those watching from every corner of the planet. Do not be intimidated by the political caste or the parasites living off the state. Do not surrender to a political class that only wants to perpetuate itself in power and maintain its privileges.

You are social benefactors. You are heroes. You are the creators of the most extraordinary period of prosperity we have ever experienced. Let no one tell you that your ambition is immoral. If you make money, it is because you offer a better product at a better price, contributing to the general well-being.

Do not yield to the advance of the state. The state is not the solution. The state is the problem itself. You are the true protagonists of this story, and know that from today, you have an unwavering ally in the Argentine Republic.

Thank you very much, and Long live freedom!

South Korea and Brazil followed similar development paths until the mid-1980s. Then, they separated, with South Korea progressing into the club of rich nations while Brazil languished in the “Middle-Income Trap.” South Korea took the arduous path of moving up value chains and conquering global markets for manufacturing exports; Brazil deindustrialized and reverted to its historic dependence on commodities.

Looking back to distant history, both South Korea and Brazil were regional laggards. Korea trailed Japan and Taiwan on the path to industrialization; Brazil fell behind its Southern Cone neighbors, Argentina, Chile, and Uruguay. Korea suffered the collapse of the Joseon Dynasty (1897), Japanese colonization (1910-1945), and a catastrophic civil war (1950-1953), entering the 1960s as one of the poorest nations in the world. Brazil meandered until the 1920s, destabilized by the abolition of slavery (1888) and the collapse of the Empire (1889).

The two charts below show the evolution of GDP per capita for Korea and Brazil relative to that of the United Kingdom, which was the first country to industrialize in the 19th century. Korea is compared to its regional peers—Japan, Taiwan, and Singapore; and Brazil is compared to other “Western Offshoots,” countries closely integrated financially and commercially with the North Atlantic countries leading the process of industrialization (Argentina, New Zealand, Australia, and Chile). In the East, Japan led the way, followed by Singapore and Taiwan. Korea only took off in the 1960s, some 80 years after Japan. For the Western Offshoots, Australia and New Zealand had fully converged with the UK by 1900, and, until the 1920s, Argentina and Chile were close behind. Brazil, set back by political instability and the legacy of slavery, lagged far behind until its take-off in the 1950s, and then caught up with its floundering Latin American neighbors.

The following chart shows GDP per capita (in 2011 USD) for Brazil and Korea over the past century. The two countries followed similar paths until Brazil distanced itself during its “economic miracle” (1950-1979). Korea took off in the 1960s, passed ahead of Brazil in 1982, and then left Brazil far behind during the culmination of the “Miracle on the Han River.”

The following chart shows more recent GDP per capita data, including IMF forecasts through 2028, at which time Korea’s GDP per capita is expected to be 3.1 times Brazil’s. This period for Brazil includes two lost decades (the 1980s and 2010s). Korea recovered quickly from two stumbles—the Asian Financial Crisis (1997) and the Great Financial Crisis (2008).

Over this period (1980-2023), Brazil became the “poster child” for the “Middle-Income Trap.” The Latin American Debt Crisis (1982) and the fall of the military dictatorship (1964-1985) enabled the rise of the socialist left and resulted in the passage of an illiberal and statist “welfare” constitution (1988) that severely debilitated public finances and dramatically increased the political and financial power of rural states at the expense of urbanized industrial states. The new constitution led to rising public sector spending, fiscal incontinence, and a sharp reduction of the capacity of the state to invest in public goods. While government revenues as a percentage of GDP rose from the mid-20s in the 1980s to the low 40s over the past decade, deficits have been chronic, and the capacity of the public sector to invest has fallen to near zero. As shown in the charts below, the contrast with Korea is shocking. The Korean public sector operates with half the revenue of Brazil yet achieves consistent fiscal surpluses and is able to deliver world-class public goods (infrastructure, education, healthcare, and support for cultural institutions).

The collapse in the state’s ability to invest in public goods can be seen in the deterioration of infrastructure and education and human capital. The next charts show the World Bank’s rankings for infrastructure and logistics, the OECD’s rankings for education assessment, and the World Bank’s Human Capital Index. In all these measures, Korea ranks near the top while Brazil does poorly even compared to emerging market peers.

In 1982, the year that Korea passed Brazil in terms of GDP per capita, the two countries were at similar levels of industrialization, with Brazil having a small edge. Both countries, relying on similar models of industrial policy, forced savings, and directed lending, had dominated basic industries (steel, petrochemicals, cement, etc…) and mass manufacturing (autos, appliances, etc…) and had made important strides in the production of capital goods. As the following table shows, a decade later, the situation had changed dramatically. Brazil experienced a significant reduction in its manufacturing value-added to GDP ratio between 1984 and 1994. This period coincides with the passage of the new illiberal constitution in Brazil, economic volatility and hyperinflation, and a widespread belief that the industrial policies and protectionism supported by the military regime had engendered inefficient and coddled oligopolies.

Starting in the early 1980s, the world entered a period of trade hyper-globalization underpinned by the Reagan-Thatcher Neoliberal “Revolution and the “Washington Consensus” for the liberalization of trade and financial flows. Unfortunately, Brazil, unlike Korea, was poorly positioned to benefit from the trend towards open markets. Brazil, in fact, was a primary loser of globalization. If one agrees that a key measure of economic development is the complexity of a country’s exports—the premise of the Economic Complexity Index (ECI) compiled by Harvard’s Growth Lab—then globalization has been a catastrophe for Brazil and a huge boon for Korea. The chart below shows the evolution of the ECI since 1995. While Korea and Brazil were at similar levels of ECI in 1995, by 2020 Korea has moved to the top 5 while Brazil had plummeted. Over this period, Korea became a leading exporter of advanced technologies (semiconductors, digital displays, electric batteries, etc…) while Brazil returned to being almost exclusively an exporter of commodities (Embraer’s regional jets being an exception).

The success of Korea, as well as all the Asian Tiger economies, has been based on capturing export markets for manufacturing goods. Foreign markets have been instrumental in providing both scale and discipline to domestic firms. As shown in the chart below, by 1985 Korea, with an economy less than half the size, already exported more than Brazil.

The accelerated rise of China in the 1990s presented a momentous threat to Korea, which found itself caught in a “sandwich” between advanced economies that dominate the high-end market and Chinese manufacturers that were quickly catching up.

Over the next crucial decade, Korean firms successfully moved up into frontier technologies while Brazil turned away from manufacturing, as shown in the next chart. While both Brazil and Korea have increased their exports to GDP ratio since the 1980s, for Brazil, all the increase has come from commodities, while for Korea, most of the increase has come from manufactured goods.

The deindustrialization of Brazil has had enormous and probably irreversible consequences for labor productivity and consumption. Highly productive and well-remunerated jobs in manufacturing and industry have been replaced by service jobs with low productivity, providing little training. As shown below, though productivity growth in Brazil had been in line with Korea’s, it collapsed in the 1980s and has been near zero over the past decade.

Manufacturing jobs and the training they provide created the middle-class consumer in Brazil. Without the expansion of the middle class, Brazil is now unable to grow as a consumer market unless state welfare handouts increase. We can see this in the inequality data collected by the World Bank and The World Inequality database shown below. Over the past 40 years, Korea has incorporated nearly the entirety of its population into the middle class (measured at annual GDP per capita of over $10,000 in 2015 USD) while Brazil’s middle class still is almost wholly concentrated in the top income decile of the population. This means Korea, with a quarter of Brazil’s population, has more “consumers” than Brazil and grows consumption at a faster pace.

While Brazil missed the boat on trade globalization, it did embrace the opening of financial flows. Unlike Korea, which has maintained capital controls, Brazil abandoned them in 1990, subjecting itself fully to the vicissitudes of “hot money” flows. The concurrent deindustrialization and financialization of the Brazilian economy led to generations of engineering graduates migrating from industry to financial engineering, while in Korea, they continue to build things. In a generation, Sao Paulo has repositioned itself from an industrial powerhouse to a city centered around the “Faria-Lima” financial casino.

Brazil’s economy has returned to a level of dependence on commodities last experienced in the early 1950s. There have been two major drivers of this process. First, while since the 1980s state support for industry has disappeared, support for agriculture has been consistently abundant. Ironically, while Brazil abandoned the East Asia-like state incentives for industry it had under the military regime (subsidies, directed credit, and market protection) for farm commodities, these kinds of policies continue to be embraced by Brasilia, in part because of the increased political clout given to farm states by the 1988 Constitution. Moreover, like in the case of Asian Tigers, state support is now being directed to a sector that is extremely competitive and export oriented. However, unlike Asian manufacturing exports, the commodity sector has low economic complexity and value added and provides few jobs.

The second driver was the discovery of enormous pre-salt offshore oil fields (2005) which have eliminated Brazil’s historical dependency on oil imports. Oil production and exports are expected to ramp up over the next decade providing structural support for the current account and the currency. As in the case of farm commodities, the oil sector is capital intensive and generates few jobs.

Both these commodities have volatile prices that cause economic and currency instability and other ills. The “Commodity Curse” and “Dutch Disease” are terms coined by economists to describe the malign influence commodity dependence has on institutions (law and order, corruption, etc…) and other drivers of growth.

Dependence on commodities creates a vicious cycle of deindustrialization through currency volatility. Manufacturing exporters like Korea manage their currencies to preserve competitiveness. Brazil with its exposure to hot money flows and commodity prices is a volatility machine which makes life impossible for exporters of manufacturing goods. We see this in the chart below. While Brazil’s currency is a roller coaster, soaring and diving in function of commodity prices and hot money flows, the Korean won is managed for stability and competitiveness.

Conclusion – What will the future bring?

Brazil missed the boat on the trade globalization of the past 40 years while Korea was a primary beneficiary. However, the world is now changing, as protectionism and industrial policy cycle back into favor.

Korea’s “sandwich” problem has not gone away, and its reliance on foreign markets may now be a liability. Moreover, Korea faces a severe demographic problem with the prospect of a declining population and workforce for decades to come. Regional geopolitical tensions may also be highly destabilizing. On the positive side, Korean society is highly homogeneous, collective, and collaborative and has proven highly adaptive to change.

Demography is a lesser issue for Brazil, though its “demographic dividend” of the past decades will become a drag in the coming years. Deglobalization and the newfound popularity of industrial policy may provide an opportunity for productive investment. On the negative side, Brazil’s highly heterogeneous population, a total lack of collective and collaborative spirit, and fractured politics do not promise an easy turnaround.

 

That economic activity is transformed energy is a truism. Technological innovations, allowing the harnessing of wind, water, coal, oil, nuclear, and solar power, were the driving force behind the Industrial Revolution since the 18th century. Yet, because of environmental concerns, energy consumption growth has slowed, and political pressures are increasing to radically reduce the consumption of hydrocarbons, which are still by far the primary source of fuel.

The two charts below show the dramatic slowdown in global energy consumption growth, based on data from the Energy Institute Statistical Review of World Energy  (link). This decline has been partially voluntary to the extent that conservation policies and higher energy taxes since the 1970s have incentivized lower consumption. In effect, many “rich” countries have chosen to explicitly recognize the economic externalities related to hydrocarbon consumption (pollution, climate change), even if with some hypocrisy to the extent that polluting industries have simply moved offshore (e.g., petrochemicals to China and the Middle-East). Also, lower consumption growth resulted from the Great Financial Crisis (2007-08) and the decade-long period of sub-par growth that it engendered. Consumption growth in the OECD has been negative since the 2000 recession. This is the first time in 200 years that this has happened for such a long period of time and certainly has contributed to declines in productivity and GDP growth.

As primary energy consumption growth has stalled in rich countries, developing countries have taken up some of the slack, as shown in the following chart from the FT.

In addition to China and India, rapidly growing developing countries in South Asia and Africa representing about 30% of the world population also continue to grow energy consumption quickly. These countries all have per capita consumption levels well below the level of the OECD countries and the US, and their future growth and welfare are tied to increased energy consumption to raise living standards and acquire the basic comforts of modern life.

The Non-OECD countries consume about a third as much energy per capita as the OECD countries and 17% of the energy consumed by Americans, as shown in the following chart. Indians consume 15% and 9% of the per capita energy consumed in the OECD and the US, respectively. Africans consume less than 3% and 2% of the per capita consumption in the OECD and the US.

The negative impact on the growth of world energy consumption caused by stagnation in the OECD is losing strength for the simple reason that the OECD’s share of total consumption is rapidly declining, as we can see in the next chart. When consumption growth stalled in OECD countries some twenty years ago, the OECD had 60% of world consumption, but that has now fallen to 39%.

If we assume that the growth trends of the past decade persist for the next ten years, then world primary energy consumption annual growth would increase from 1.1% to 1.9%, and the Non-OECD share of total consumption will rise from 61% to 65%. As shown in the chart below, under this scenario, total primary energy consumption would rise a further 20% over the next ten years.

In a world facing increasing risks from global warming, ideally, this increased consumption will be met by “clean” energies, but so far only Europe seems committed to this goal. Both China and India remain wedded to coal, nuclear remains generally taboo, and most countries face political opposition to the high cost of transitioning to solar and wind.”

In the following blog, we will explore the role of hydrocarbons in the ongoing transition to clean energy.

 

 

 

Recent decades have brought impressive gains in prosperity for many developing countries. By attracting investment and opening up to the world, many countries have been able to grow more quickly than rich countries that operate at the technological frontier. However, this process of growth has not benefited all countries. Worse, many poor countries have fallen behind, becoming relatively poorer.

Convergers in emerging markets can broadly be separated into two categories: first, countries attracting foreign direct investment and participating in the globalization of trade; second, countries starting from a very low base and achieving high growth because of successful economic reforms leading to increases in productivity. Highly successful convergers (e.g., China, Vietnam) have benefited both by launching economic reforms and by integrating into the global economy.

The chart below shows increases in GDP per capita, measured in 2015 constant USD, for the 1995-2022 period, as calculated by the World Bank. 1995 is used as a starting point because this is when the World Bank starts showing data for “Eastern Bloc” countries. We can see in the chart that the U.S., with GDP per capita growth of 50% over this period, is near the middle, so about half the countries in the sample “converged” by growing more than the U.S. benchmark, and about half fell behind. About 20% of the sample, typically countries undergoing revolutions, wars, or environmental disasters, had zero to negative growth. The chart highlights China and Vietnam as star convergers, Brazil as a laggard, and Zimbabwe as a country suffering a severe institutional breakdown.

Convergers

Northeast Asia, Southeast Asia and Eastern Europe have been the major beneficiaries of capital flows and trade liberalization and have all experienced GDP per capita growth well in excess of the United States. We show this in the charts below for the 1986-2022 period using data from the World Bank. 1986 is a convenient starting point as it marks the initiation of MSCI’s Emerging Markets Index and, approximately, the beginning of globalization and financialization of the world under the “Washington Consensus.” For Eastern Europe, the World Bank data is available only starting in 1995.

The Asian “Tigers” have all followed similar mercantilistic policies, subsidizing exports through subsidies and repressing domestic demand and wages to support competitiveness. All of them have benefited greatly from U.S. policy support and easy access to the U.S. consumer market. This U.S. support of China has been significantly reduced since 2019 when China was determined to be a strategic adversary, which raises serious doubts about future convergence. (Data for Taiwan is not included because the World Bank neglects to include the country in its database)

 

The chart below shows the growth of GDP per capita for the major economies in South-East Asia plus India. The countries in this region, with the exception of India and the Philippines, have largely followed the same policies as the East-Asia “Tigers,” including direct and indirect subsidies for exports and foreign direct investment (FDI), especially after the hard-earned lessons of the 1997 Asian Financial Crisis. These countries have all achieved significant convergence. The Philippines has traditionally been a more concentrated, financialized, and volatile economy with less attractiveness for FDI and less support for exports, but in recent years, it has improved its performance and also achieved some convergence. India has experienced strong growth since economic reforms in the 1980s and is starting to attract more FDI, even though its growth is driven more by infrastructure spending and rural support than by manufacturing. India, benefiting from a starting point of exceptionally low GDP per capita, has rapidly converged over this period. Pakistan’s efforts to grow by attracting FDI into manufacturing export industries have been undermined by political instability, but still, it has achieved some convergence.

The following chart shows the countries of Eastern Europe. These countries have all benefited from the collapse of the Eastern Bloc, which freed them to promote private investment and integration into western Europe. Greatly helped by support from the European Union, they have become manufacturing centers for global corporations, taking advantage of low wages to access the European market. All of these countries have experienced significant convergence relative to both the U.S. and the Euro Area since 1995.

Middle-East and Africa (EMEA)

The EMEA region is a motley group, including both rapid convergers and laggards. Turkey, which is more like an Eastern European country in its success in attracting FDI and exporting to the European market, leads thisregion in convergence. In the Middle East, Egypt has converged, starting from a very low level of GDP per capita and benefiting from ample U.S. support. On the other hand, the UAE and Saudi Arabia have significantly lost pace due to rapid population growth, volatile and declining oil prices, and costly initiatives to reduce dependence on the oil sector. In Sub-Saharan Africa, Botswana has achieved convergence through sound and consistent macroeconomic policies and successful diversification away from diamond exports. On the other hand, both South Africa and Nigeria have lost ground because of corruption, political instability, and sustained flight of human and financial capital.

Laggards – Latin America

Finally, Latin America is the major outlier in emerging markets in its sustained poor economic performance and lagging GDP per capita growth. This conundrum has been called by economists the “Middle-Income Trap” and is loosely attributed to inconsistent and poorly designed policies and deteriorating “institutions.” Other possible contributors to Latin America’s decline have been extreme wealth concentration and sustained human and capital flight. Also, the region’s excessive and increasing dependence on commodity exports have subjected countries to highly destabilizing boom-to-bust cycles (referred to in economics as the “Natural Resource Curse).

The three largest economies in Latin America—Brazil, Mexico, and Argentina—have all grown GDP per capita at a rate well below the U.S. and can be considered poster children for the “Middle-Income Trap.” Chile, the strongest economy in the region, has stagnated over the past decade and faces increased political discord and policy confusion. Colombia and Peru have also stagnated and face similar uncertain policy environments. The highlight of the region is Uruguay, a small economy that has avoided the pitfalls of its neighbors and quietly pursued prudent policies.

 

 

 

 

The world’s most prominent central banks operating in the largest and most liquid financial markets have successfully implemented financial repression policies over the past three years which have significantly reduced debt burdens.

The prize for the most agressive financial repression goes to the Bank of England. Negative interest rates over the past three years averaging -3% have reduced the U.K.’s total debt to GDP ratio by a whopping 71%, from 315% to 243%; and government debt to GDP was reduced by 47% , from 141% to 94%. As the chart below shows (data from the Bank for International Settlements, BIS) this pattern of financial repression has been the norm, and led by the world’s leading financial powers, the Euro Group and the United States in particular. The United States has has negative interest rates in 14 of the past twenty years, and since 2020, these policies teamed with “fiscal dominance” have caused a sharp fall in debt ratios.

In the case of emerging markets, Turkey, Poland, Malaysia, Argentina, Chile and Saudi Arabia stand out for their reductions in debt loads. Korea, China and Thailand are among the few countries that saw their debt burdens increase over this period. China, which faces strong deflationary forces caused by excess capacity, malinvestment, a real estate bust and a sharp decline in consumer confidence, has seen its debt ratios continue to rise from already extremely high levels. China’s total debt to GDP ratio rose over the past three years from 294% to 306%. Moreover, if China’s GDP is overstated by as much as 25% as many economists argue, China’s ratio may be approaching Japan’s stratospheric 407% ratio.

The case of Brazil is somewhat unique and points to the future for other countries. Brazil’s central bank has pursued ultra-orthodox policies, meaning that it has managed only a brief honeymoon with negative interest rates and now faces a long period with high real rates. Central bankers in Brazil don’t have room for financial repression, being as they are reined in by unstable “hot money” capital flows from both domestic and foreign investors.

The U.S. Fed, though in a much better shape than Brazil’s central bankers, is also facing challenges from new inflationary forces and fiscal deficits that are expected to rise consistently to fund the retirement of Baby Boomers.

The losers of financial repression (e.g., holders of government bonds and mortgage securitizations) have surely learned their lessons and, at any sign of a new crisis addressed with more quantitative easing, will flee to real assets that have a better chance of preserving value.

 

 

 

Emerging market stocks have persistently underperformed the S&P 500 for the past decade, leading to renewed faith in American exceptionalism and consistent international flows into the perceived soundness and reliability of U.S. assets. Nevertheless, if we look at the data, we can conclude that there are good reasons for the run in U.S. stocks but also evidence to believe it will not last for ever.

The performance of EM stocks relative to the S&P 500 can be seen as a tale of two decades. As the chart below shows, EM stocks dominated for the first ten years while the S&P 500 won handily in the second decade, through June 2023.

Most of this performance can be explained by  changes in valuation as measured by price-earnings and CAPE ratios (CAPE, cyclically adjusted PE), as shown below.  U.S. ratios started high in 2002 and fell during the next decade and then rebounded in the 2012-2023 period. The exact opposite occurred for EM:  ratios were at very low levels in 2012, rose during the decade and now have fallen back to low levels.

The chart below digs deeper to further explain the disparate performances of EM and S&P 500 stocks over the past two decades, by showing annualized earnings growth and currency effects for both assets. The chart breaks down annualized index performance for both decades in terms of earnings and PE multiple expansion, and also provides the contribution from currency exchange  rate movements for emerging markets. The S&P suffered from significant multiple contraction in the first decade and benefited from a large multiple expansion in the second decade. EM benefitted from strong earnings growth boosted by currency appreciation in the first decade and suffered from negative earnings growth pushed down by  currency depreciation in the second decade. CAPE ratio for the S&P 500 fell slightly between 2002 and  2012 and then expanded massively in the second decade, while CAPE ratios for EM rose sharply between 2002 and 2012 and then collapsed from 2012 to 2023.

The drivers of S&P relative performance over the past decade have been primarily multiple expansion and dollar appreciations, two factors that have proven to be cyclical in the past and highly prone to reversion.

We can also point to other extraordinary events that have provided a one- time boost to the S&P 500 index.   Recent work from Michael Smolyansky at the Federal Reserve ((link) and Minje Kwun at Verdad Capital (link)  highlight the importance that reductions in corporate taxes and low interest rates have had in driving earnings growth over the past decade. The chart below shows the remarkably favorable circumstances that American corporations have had since the late 1980s, and the sharp fall in interest rates and taxes over the 2012-2022 period. The recent rise in interest rates and the prospect of rising U.S. debt and fiscal deficits point to a cyclical reversion of these trends in the coming decade.

None of the factors boosting U.S. stocks have benefitted emerging market stocks over the past ten years, which may leave EM stocks better positioned to outperform.

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During my freshman year in college in 1976, I took a class on development of the “Third World” which highlighted Brazil’s “economic miracle” and its rise as a leading economic power. That same year, the renowned MIT economic historian Charles Kindleberger, mulling over what country might assume global leadership from a waning United States, suggested Germany, Japan “or some country of energy and wealth, like Brazil, which has yet to make its presence felt on the world scene.”

By the early 1980s, Japan was considered by many to be the most dynamic economy in the world and on the way to surpassing the U.S.  This “miracle” economy was accompanied by a huge asset bubble, with real estate prices in Tokyo peaking in 1989 at 300 times the level of equivalent space in Manhattan.

China, the latest “economic miracle,” is now expected to become the largest economy in the world by the middle of this decade. The debates of the 1970s on global leadership have resurfaced, as the U.S.  shows signs of fatigue from shouldering the burdens of a benevolent hegemon, and China aims to reshape the world economic order into something new.

However, history shows us that economic “miracles” end in excesses of debt and speculation, and are followed by long periods of stagnation.  The Brazilian and Japanese booms are distant memories, and these economies have struggled to work out the large imbalances built up during the good years.  China’s rise also came with massive debt accumulation and an enormous real estate bubble, and it too faces a difficult transition.

At least, this is the view of the Beijing-based economist Michael Pettis, a Professor at Peking University’s Guanghua School of Management, and a keen observer of China’s developmental challenges. Pettis argues that China’s economic miracle peaked many years ago, and the drivers of growth – labor growth, investment, and exports – are now all severely constrained. Given its level of development and these constraints, Pettis argues, China now should promote consumption to sustain growth, but this path is blocked by vested interests (the beneficiaries of the previous model: provincial governments, exporters, business elites). Pettis sees a clear parallel with what has happened in Brazil and Japan, where reactionary political, business, and financial elites blocked the reforms necessary to secure sustained economic expansion.

The imbalances of China are well known and long dated. Early in 2007, Wen Jiabao (溫家寶), premier of China at the time, declared that the country’s economic growth trajectory was “unstable, unbalanced, uncoordinated and unsustainable.” Since Wen Jiabao expressed his concern, China’s debt to GDP ratio has doubled, and the real estate sector’s share of GDP grew by 50% to unprecedented heights. We can see the rise in debt levels in the chart below from the Bank for International Settlements. Given that most economist believe that China’s GDP is overstated by at least 20%, actual debt ratios may be considerably higher.

The following chart from  Rogoff and Yang (2020) shows the disproportionate share of China’s GDP related to real estate, surpassing greatly the levels reached in other countries affected by real estate bubbles.

The Chinese “economic miracle,” Pettis argues, petered out over a decade ago as productivity growth and returns on investment collapsed. GDP growth has slowed sharply, and the quality of that growth is dubious, as it comes increasingly from unproductive investments related to infrastructure and real estate. We can see this in the three charts below. The first shows the path of GDP growth, both based on official data and on the basis of an alternative methodology which aims to align China’s numbers with those of other countries. The second and third chart  show the composition of that growth for both GDP data sets. Over the past ten years, GDP growth has been cut by more than half, from the low teens to below 5%.  Meanwhile, the quality of the growth has deteriorated dramatically, coming now primarily from investment capital instead of labor growth and productivity. We can see this deterioration more starkly in the alternative data. This data comes from The Conference Board and has been developed in a partnership with the Groningen Growth and Development Centre (University of Groningen, The Netherlands) (Link).

China’s over-dependence on capital investment is in line with the experience of other Asian “tiger” economies, as described by Paul Krugman in his 1994 article “The Myth of Asia’s Miracle.” Both the Brazilian “miracle” of the 1960s and 1970s and the Japanese “miracle” of the 1980s followed a similar pattern of investment-led growth hitting a wall when returns on capital declined and debt levels reached high levels.

The Brazilian Miracle

 Brazil experienced very high growth from the 1950s to the end of the 1970s. Much of the growth in the 1950s was driven by multinational firms bringing mass production manufacturing to the country, in a process very similar to what China went through in the 1990s and 2000s. Mature technologies and business models were easily assimilated and had the advantage of being highly labor intensive. In the 1960s, more FDI came to meet Brazil’s growing consumer market, and “Asian-like” public policies were introduced to promote domestic savings and investment. During the 1970s, Brazil, benefited from a commodity boom but debt levels rose sharply (especially external debt), and investment quality and returns plummeted (increasingly pharaonic projects, roads to nowhere, as in China). The boom came to an end in 1980, and since then Brazil has stagnated, achieving growth of GDP 2.1% per year and GDP per capita growth of 0.8% annually. The mass production paradigm that benefitted Brazil so much in the 1960s and 1970s was exhausted by 1980. Since then, Brazil has been unable to grow its consumer market, leading MNCs to focus on better opportunities elsewhere (Asia, Mexico). Brazil became the poster-child for the “middle-income trap” – a middle-income economy unable to build the institutions required to sustain growth.

The first chart shows the path of GDP growth, and the second shows the enormous debt accumulation and fiscal deficits towards the end of the “miracle” in the 1970s. The third chart shows the composition of growth from 1952-2023. Remarkably, total factor productivity declined from 1.6% annually between 1952 and 1979) to negative 0.9% annually from 1980 to 2023. TFP declined sharply in the second half of the 1970s as investment-led growth lost traction.  Since 1980, Brazil has deindustrialized dramatically, and today the economy has returned to the commodity-dependence levels experienced before the industrialization process took off in the early 1950s.

Japan’s “Economic Miracle”

Japan enjoyed very high GDP growth during the 1950s and 1960s. This growth was briefly interrupted by the 1973 oil crisis, but then resumed in the second half of the 1970s and into the 1980s. This later phase of growth was characterized by real estate and stock market speculative bubbles. The asset bubble popped in 1989, and since then annual GDP growth has averaged 0.9%.

The chart below shows the contribution of labor, capital, and total factor productivity to Japan’s GDP growth. We can see broad contributions from all these factors from the 1950s until 1989, with a sharp increase of reliance on capital in the 1980s. As in Brazil in the 1970s and China over the past decade, declining returns on capital during the 1980s asset speculative boom marked the end of the Japanese miracle. From 1951 to 1989 TFP contributed 2.4% to annual GDP growth, but from 1990 until 2023, this contribution has been -0.9% annually.

 

Conclusion

Unfortunately, “economic miracles” are more chimerical than miraculous. This is most true in the last phase of the boom when excesses and speculation generate mainly malinvestment.

The post-boom periods tend to be painful and drawn-out because the beneficiaries of the past resist the reforms necessary to achieve a rapid transition to a more sustainable growth model. The U.S came out of the Great Recession of the 1930s because radical “anti-elite” measures implemented by President Roosevelt became consensual in the post-war boom. Brazil’s political and financial elites have resisted the reforms needed to improve income distribution and create a broader consumer market. The political process in Japan also has failed to change the investment and export-focused economic model. China appears to be following Japan’s example, as it continues to focus on the exhausted drivers of past growth instead of actively pushing for policies that would build the purchasing power of households in a consumption-driven economy.

As the world moves away from the globalization of manufacturing value chains and finance, the protection of domestic markets is back in favor with policy makers. However, the new mercantilists will have to overcome high costs, including overvalued currencies.

The case of TSMC’s investment in a new $40 BB semiconductor  plant is illustrative. The Taiwanese chipmaker gave in to pressure from the Biden Administration  and agreed to build a “fab’ in Arizona, but it does not seem to be happy about it. Recent press reports say the Taiwanese chipmaker’s management is dismayed by “exorbitant costs and unmanageable workers.”

TSMC’s preference for manufacturing at home is not surprising. Taiwan is a model of successful mercantilist policies (repression of wages, directed credit and competitive currency) that create a haven for manufacturing exports. Taiwan, and other Asian “tigers”, have carefully managed their currencies to assure export competitiveness. The U.S., on the other hand, has long favored consumers over manufacturers, and has an overvalued currency, which serves as the safe haven asset for the rest of the world.

We can see the challenges faced by the new mercantilists by looking at relative exchange rates. Below, we shows the Big Mac Index rankings and Real Effective Exchange rates. The Economist’s Big Mac index is a good measure of the overall cost for  businesses to operate in an economy, as the product being compared incorporates farm, manufacturing, and services, including taxes and regulations. Countries with an established vocation for manufacturing exports are labeled in green, while commodity producers that rely more on imports are labeled in bold black. The chart compares three data points — today, 2020 pre-covid and 2010. We can see that across these periods exporters have cheap Big Macs and importers have expensive Big Macs. There are some exceptions for importers, explained by excessive political instability and capital flight (South Africa, Argentina in 2010, Peru and Brazil in 2023).

Brazil and the United States, two countries now enthusiastically pursuing neo-mercantilist agendas, are interesting and similar cases. They both are  countries that have severely deindustrialized, while at the same time expanding energy production aggressively. Both went from large importers of oil to self-sufficient since 2010, which, all else being equal, means  stronger currencies. The implication is that neo-mercantilist policies will be pursued at a high cost, without the luxury of a weak currency.

Real Effective Exchange Rates (REER) tell the same story. The exporters are all close or below long-term averages, with Thailand the possible exception. Vietnam is an interesting case of an aspiring Asian “Tiger” that may be undermined by an appreciating currency, the result of diplomatic pressure from the U.S.

The irony is that commodity prices are likely to remain high in the 2020s because of a more inflationary environment and production bottlenecks. This would mean stronger currencies for commodity producers and even higher costs to implement reindustrialization policies. The “commodity curse” is difficult to shed.

After a brutal decade for emerging markets stocks marked by poor absolute returns and dismal performance relative to the S&P 500, it is timely to review how the asset class fits into a global allocation process.

Any investor in emerging market bonds or stocks, unless he or she is a dedicated portfolio manager with a mandate to outperform an EM index on a short term basis (1-3years), should operate under the following assumptions.

1.“Buy-and-hold” does not work in EM.

2. Risk always trumps valuation in EM stocks and bonds.

3. EM stocks are liquidity-driven trending assets.

4. The U.S. dollar drives returns and is negatively correlated to EM stocks and bonds.

The first premise – “Buy-and-hold” does not work in EM – is derived from the other premises. Emerging markets are too subject to “sudden stops” of liquidity to provide reliable returns for investors over meaningful periods, say over a decade. Empirical evidence clearly guides investors to avoid “sudden stops” by focusing more on risk than on valuation. Risky market conditions, measured by macro vulnerability (debt, deficits, overvalued currencies), domestic politics and geopolitics (e.g., Russia), will almost always trump low valuations. Low valuations and low risk provide the best conditions, but you are better off owning expensive stocks in a low-risk country than cheap stocks in a risky country. Of course investors tend to do the opposite,  as we last saw in 2008-2012 when EM bulls courted disaster by buying extreme valuations at a time of extreme risk.

If buy-and-hold is a losing strategy, the question is how to time allocation exposure to EM markets. The answer lies in premise three and four. History shows us that EM assets are trending assets, and this is for good reasons. Therefore the job of the allocator is to identify the trends and ride them  until they exhaust themselves. The first chart below shows the performance of the MSCI EM stock index relative to the S&P 500  over its 35-year history. We can clearly see two periods when allocations to EM stocks paid off handsomely for investors: 1987-1994 and 2001-2012. Unfortunately, all this relative outperformance was wiped out in the past ten years. The second chart, from BOFA’s recent 2023 Market Outlook, shows the relative performance over a much longer 72-year period. Though it is problematic to come up with a realistic EM index over this period, BOFA’s data shows a third massive cycle of outperformance for EM stocks lasting from 1970-1980.

There are two fundamental causes behind these long trends: valuations and the U.S. dollar. Three of the peaks in U.S. performance (1970, 2000, 2022) are characterized by very high valuations in the U.S. (the Nifty Fifty bubble in 1970, the TMT bubble in 2000 and the Everything Bubble of 2022) and an overvalued dollar. All the periods of EM outperformance start with low relative valuations and an expensive dollar. This insight is confirmed by the DXY dollar index, shown in the next chart. Every spike in the DXY (dollar strength) is accompanied by strong relative performance of U.S. assets.

This relationship between the USD and EM stocks is further illustrated in the chart below. We can see the obvious negative correlation between EM stock prices and the DXY.

 

Another chart from the BOFA 2023 Outlook points to another fundamental correlation with important consequences for EM investing. This chart shows how growth stocks (tech and healthcare ) are negatively correlated to value/cyclical stocks (energy and financials).

This is a critical insight with important implication for EM allocation. EM stocks can be considered value stocks with a dominance of cyclical exposure in commodities and industrials.

We can see this insight confirmed by the chart below which shows the correlation between the S&P Industrial Metals Index (GSCI) and the DXY. The chart looks almost the same as the chart above that showed the relationship between EM stocks and the DXY.

 

 

As we can deduce from the following chart, EM stocks are a leveraged play on the prices of industrial metals.

This relationship leads to a further important insight for EM allocation. On both a global or a country basis, the simplest and most cost-effective manner to gain exposure to EM stocks is through commodity stocks. This is shown in the next two charts, which show first the performance of mining companies relative to the EM index and the performance of Vale relative to the Brazilian index. These stocks outperform massively on the uptrend and underperform on the downtrend.

Therefore, for a global allocator investing in emerging markets can be simplified to owning blue-chip mining firms during upcycles and unloading them when the cycle turns. However, we still have to identify the cycles. To do this the allocator must follow the trends and valuations.

A simple method to gauge the condition of the long-term trend is to look at the one-year relative performance of the S&P 500 relative to EM stocks and the U.S. dollar relative to other currencies.

The chart below shows that the S&P 500 continued to outperform EM stocks (with and without China) over the past year.

The DXY also is still in an upward trend on a 1-year, 3-year and 5-year basis, as shown below.

Valuation is also an important element in determining turning points. We know that U.S. stocks and the U.S. dollar both are very expensive relative to history. As shown below, we also can be confident that EM stocks are cheap relative to their own histories and compared to U.S. stocks.

A sign that a new trend may be forming is that value, cyclicals and the cheapest EM stocks (e.g., Turkey) all have been outperforming this year, while U.S. tech is faltering.

“A second marriage is the triumph of hope over experience.” Samuel Johnson

Brazilian voters have the sorry task of choosing between two deeply flawed political figures in a runoff presidential election on October 30. The frustration is increased in that the two candidates already have proven their incompetence for the job, so the choice can only be grounded in hope over experience.

The alternative is between Luiz Inacio Lula da Silva, the caudillo who has run the Workers Party (PT) for decades, including a 14-year stretch (2002-2016) marked by rampant corruption, and Jair Bolsonaro, a right-wing evangelical populist with a truculent manner, an unsavory environmental record, and a deep nostalgia for the “order and progress” of military dictatorship (1964-1985). Most voters are motivated by fear and rancor and resigned to choosing the least-worse option; either “a corrupt thief” (Lula) or “a genocidal fascist” (Bolsonaro), as the candidates defined each other in a recent public debate.

The political, media and business elites in Brazil mainly have sided with Lula, if with a pronounced lack of enthusiasm. The rationale is that Lula is “more democratic,” though this overlooks his fervent admiration of Cuba’s Castros and other Latin American dictators and his antagonism towards Brazil’s vibrant free press.   Bolsonaro is lambasted for adulating Trump and siding with right-wing strong-men around the world. Bolsonaro also is accused of plotting to bring back a military dictatorship to Brazil, though there is no evidence that the military would countenance this unless social order declined precipitously, and the middle classes took to the streets clamoring for an intervention.

Lula’s key campaign promise is that he will bring back the consumption boom experienced during his presidency (2002-2010) which resulted from a surge in commodity prices and a massive positive terms-of-trade shock. This was a period of prosperity when purchasing power expanded greatly for low-skill workers and investment bankers alike. As Lula tirelessly repeats: “They know that never in the history of this country they made so much money as when I was president. Bankers made money, businessmen made money, farmers made money.”

However, Lula grossly mismanaged the commodity boom, and it was followed by a severe case of “Dutch Disease’ (the natural resource curse) from which Brazil still has not recovered.

“Dutch Disease,” named after the economic instability caused by the discovery of gas fields in the Netherlands in the 1960s, is well documented, and responsible natural resource producers (e.g., Norway, UAE) have learned to avoid it by taking preventive measures e.g., offshore sovereign funds.  The discovery of the huge pre-salt offshore deposits by Petrobras in 2005 and the China-induced commodity super-cycle (2002-2012) caused a massive terms-of-trade shock for Brazil.  Unfortunately, Lula fell right into the trap, and Brazil followed the classic course of Dutch Disease as outlined by academics.

1. Currency overvaluation, resulting in the decline of the trade sector and deindustrialization, followed by devaluation.
2. A credit-fueled consumption boom, followed by lower growth and reduced living standards.
3. Monetary expansion and asset bubbles followed by crashes.
4. Increase in corruption and rent seeking, undermining confidence in judicial and political institutions.

Corruption scandals marred the 14 years of PT rule. Moreover, Lula undid important administrative and economic reforms that had been achieved under his predecessor, Fernando Henrique Cardoso.

 Since the end of the PT’s rule in 2016, Brazil’s economy has been in a depressionary state. But slowly the foundations of growth have been restored by competent monetary and fiscal policies and a series of important reforms. These include pension, labor and bankruptcy law reforms, and laws setting a ceiling on fiscal spending, guaranteeing Central Bank Independence and for the regulation of water and sewage utilities. Since 2016, Brazil has also seen its most important wave of privatizations since the 1990s. This includes the spectacular privatization of Eletrobras, the national electricity utility, which for decades had been a bountiful source of graft for politicians. Next on the list of privatizations is Petrobras, which was at the core of the corruption scandals of the PT years. These reforms aim to make the economy more competitive and productive. Lula opposes them all and aims to overturn them.

The choice is a tortuous one for the Brazilian voter. If character is the determining factor, many will stay home or nullify their votes. If voters understand the benefits that may accrue from the current course of economic reforms, the choice may be easier.

Emerging market stocks have continued to underperform the S&P500 over the past year and the past quarter,  as global capital flows to the safety of U.S. assets in a world of rising economic instability and risk aversion. However, below the surface  interesting trends are emerging that point to better days ahead.

After a decade of poor returns, value investing (contrarian investing in cheap stocks in cyclical industries with little growth) is working again in emerging markets. The MSCI EM value index has outperformed the MSCI EM core index by 3% over the year, and, more importantly, the cheapest countries in the EM index are now by far the best performers. This is in stark contrast to the past five years when cheap only became cheaper and rich only became richer.  We can see this in the chart below which shows the performance of the four cheapest markets in EM relative to the MSCI EM index. Turkey (TUR), Brazil  (EWZ) and Chile (ECH) have beaten the EM index by huge margins over this period.  Colombia (GXG), which recently elected a leftist anti-business president, has still managed to perform in line with the market.

This trend should boost the confidence of EM investors. Emerging markets are by nature a value asset (highly weighted to cyclical businesses) and should not be performing well in an environment of rising risk aversion.  But investors are now betting that these markets are too cheap to avoid because low valuations promise high expected returns that more than compensate short-term risks.

The chart below shows the current expected returns for EM markets and for the S&P500 based on a CAPE ratio analysis. The Cyclically Adjusted Price Earnings Ratio (CAPE)  takes the average of inflation-adjusted earnings for the past ten years, which serves to smooth out the cyclicality of earnings. This is a particularly useful tool for highly cyclical assets like EM stocks.  We use dollarized data to capture currency trends. This methodology has been used by investors for ages and has been popularized more recently by Professor Robert Shiller at Yale University.

As we have seen in recent years, CAPE is not a good timing tool, but it does tend to work well over time, particularly at extreme valuations.  CAPEs below five, such as Turkey today, have historically been a failsafe indicator of high future returns. CAPE ratios that are completely out of sync with historical averages for the country are also powerful predictors of future returns. Aside from Turkey, Colombia, Philippines and Korea look very cheap on this basis. On the other hand, India , the most popular market with investors today, is an absolute outlier on the expensive side.

That cheap markets are now performing well in a risky environment is very encouraging for EM investors. If value continues to do well, EM stocks will likely do very well when the coming synchronized global and U.S. recessions  hit bottom.

The Emerging Markets asset class, for both bonds and equities, is made up of a smorgasbord of countries that don’t have much to do with one another. Very broadly, the index providers (MSCI, FTSE, Russell, etc.,)  differentiate between developed, emerging and frontier markets in terms of “investability”  criteria, such as market capitalization, liquidity and transparency. In this article, we provide a framework to further categorize  emerging markets. We look first at the basic economic structure of countries: the growth in the quantity of labor and the expected growth in the productivity of that labor. Second, we look at the capacity of countries to compete and move up value chains in a global economy.

1.Economic Structure

First, in the chart below, we look at GDP per capita, the most basic measure of a country’s relative development. We see that Taiwan, Korea and perhaps Poland are really closer to developed countries on this measure. Then , moving from left to right on the chart, we can somewhat arbitrarily group the other countries into middle-income (Chile to Thailand) and lower income (Peru to India).

Second, in the chart below, we distinguish between dynamic, stagnant and languid economies by measuring how GDP per capita for each country has evolved relative to the United States since 1980. Dynamic economies are converging with United States, the stagnant ones are “trapped” in relative terms and the languid ones are falling behind. The term “Middle-Income Trap” refers mainly to middle-income countries in Latin America that have stopped converging over this period, but there are also rich and poor countries that are neither outgrowing or growing less than the United States.

The following chart shows the long term effect of convergence for dynamic economies (Korea and China)  and a “trapped” country (Brazil). India has recently started a process of convergence, but it remains to be seen for how long it can be sustained.

GDP growth can be broken down into the growth of the supply of labor and the growth in the productivity of labor. The following three charts provide insight into labor growth for different EM countries: first, the expected annual growth in the working age population for the next decade; second, the degree of urbanization; and third, the female participation rate.  These charts show  radical extremes: On one end, a country like India ,with a growing population, very low urbanization and very low female participation, has potentially very large employment growth; at the other end, Korea ,  with negative growth in the working age population, a high degree of urbanization and a high rate of female participation, is likely to have very low employment growth.

In addition to the growth in the quantity of labor we need a notion of labor  productivity growth. The chart below shows annual labor productivity growth for the past ten years, which is a valid starting point for estimating future productivity growth.

Not surprisingly, labor productivity is linked to capital formation, as shown in the following chart.

Assuming that these rates of productivity growth persist in the future (admittedly a big assumption) and adding these to the working age population growth, we can derive a very general idea of potential future growth, which we show in the next chart.

2.Competitiveness

Another distinguishing characteristic of countries is the conditions they offer for private capital to unleash its entrepreneurial drive (“animal spirits) ,to boost productivity and innovation. These conditions —  Economic Freedom (The Heritage Foundation), or “Ease of Doing Business” (World Bank) — require  good governance and an efficient bureaucracy which provides rule of law, infrastructure and social services (education, healthcare). The result of good governance is a dynamic entrepreneurial sector which is innovative and globally competitive.

For countries to become increasingly competitive in the global economy they need 1. Human Capital; 2. Innovation and economic complexity; and 3. Growing participation in world trade for manufactured goods.

Human capital (education, health, etc.,) is measured by the World Bank’s Human Capital ranking. Also, the OECD’s  PISA (Program for International Student Assessment) provides an indication of the educational achievement levels of many countries. Both  of these are shown below.

Economic Freedom has been measured by the Heritage Foundation, the World Bank (Ease of Doing Business) and the World Economic Forum, among others, always with the objective of appraising the conditions for private investment and entrepreneurship. Below, we provide some of the findings of the Heritage Foundation’s Economic Freedom Index.

Innovation and Economic Complexity both are important indicators of a

country’s potential for moving from middle-income to higher-income status. Many EM countries, particularly those in Latin America, have not been able to innovate and move up industrial global value chains, falling into the “Middle-Income Trap.”

The Bloomberg Innovation Index ranks the major economies of the world in terms of innovation capacity. As usual, it is important to understand the historical trends of the indicator. The two charts below show the latest innovation rankings and the evolution of the rankings for the United States and China.

The Economic Complexity Index (ECI) measures the knowledge intensity of an economy. The first chart shows the rankings for a sample of major developed and EM economies. The second chart shows the evolution of the index since 1998 for three “converging” countries  (China, Korea and Poland) and two laggards (Brazil and the U.S.). Both the U.S. and Brazil are major commodity producers vulnerable to the “natural resource curse.”

 

Participation in World Trade is another critical indicator of competitiveness and growth potential. The evidence throughout history points to a clear connection between trade and prosperity. In the following two charts we contrast convergers with commodity producers. The convergers (China, Taiwan, Korea, Poland) have grown their participation in world trade while the commodity producers have low (and very volatile) participation.

Conclusion

From a macro viewpoint emerging markets include countries with very different profiles. In the chart below, we show which countries do well in growth and competitiveness. Hypothetically, the countries with growing economies that are competitive in a global economy should be attractive for investors. Unfortunately, many other factors come into play, the most important of which is the capacity for corporations to accumulate capital over long periods of time through high profitability and reinvestment opportunities. It is also important to understand financial stability and pay great attention to debt cycles, foreign flows and balance of payment dynamics.

 

 

 

 

 

História da Família Ipanema de Moreira

Há duas ruas no Rio de Janeiro que comemoram a passagem de José Antonio Moreira. Uma é a Rua Barão de Ipanema no bairro da Praia de Copacabana e a outra, a Rua Conde de Ipanema na vizinha Praia de Ipanema. Pouco se escreveu sobre esse influente empresário e financista brasileiro da colônia portuguesa de Dom João VI e do império de Dom Pedro I e Dom Pedro II. Como ele é meu antepassado, montei uma biografia curta e resumida baseada em documentos públicos e arquivos familiares. Sua história reflete a modernização do Brasil no século 19 – de uma economia de plantação escravagista para uma nação moderna em industrialização. É também uma história da má fase de  especulação imobiliária e a dissipação de riqueza por descendentes ociosos.

A trilha da família Ipanema de Moreira começa na cidade de São Paulo, Brasil, no final do século XVIII. José Antonio Moreira, futuro Conde de Ipanema, nasceu em São Paulo, em 23 de outubro de 1797, filho de José Antonio Moreira (Pai) e D. Ana Joaquina de Jesus. A família era de origem nobre, do Distrito de Braga no norte de Portugal. Moreira era um nome comum em Portugal, com o significado de amoreira, por vezes associado à comunidade dos “conversos” (conversão forçada de judeus à igreja católica).

José Antonio Moreira (pai) era um próspero comerciante de São Paulo com ligações estreitas com a administração colonial. Desempenhou um papel fundamental no desenvolvimento do primeiro empreendimento industrial moderno do Brasil, a siderúrgica de Ipanema (Fundição Ipanema).

A invasão de Portugal por Napoleão fez com que a corte portuguesa de Dom João VI fugisse para o Rio de Janeiro em 1808. Dom João VI eliminou imediatamente todas as restrições mercantilistas existentes à manufatura domestica e apoiou ativamente a autossuficiência industrial. A fundição de ferro foi considerada de alta prioridade, e uma área com depósitos de ferro nas proximidades da cidade de  São Paulo foi escolhida como o local para o desenvolvimento.

A existência de jazidas de minério de ferro na Serra de Ipanema em uma área conhecida como Fazenda Ipanema, próxima à vila de Iperó, 125 km ao noroeste  da cidade de São Paulo, era conhecida desde os primórdios da colonização portuguesa. O local escolhido para a fundição de ferro localizava-se no rio Ipanema, afluente do rio Sorocaba, e era cercado por matas que poderiam ser usadas como combustível para a fundição. A área já havia sido habitada por índios tupis, que a batizaram de “Ipanema”, em referência a um rio que ali nasce. Ipanema significa “água estagnada ou estéril” em tupi-guarani.

A sociedade foi constituída por Carta Régia em 4 de dezembro de 1810 como sociedade  acionista  de economia mista, com 13 ações pertencentes à Coroa portuguesa e 47 a acionistas  privados, empresários com ligações à corte. José Antonio foi um investidor fundador, e provavelmente representava os interesses da coroa.  O projeto era de grande interesse para Dom João IV, que contou com o apoio técnico de especialistas suecos e alemães, e sabe-se que visitou a fábrica em várias ocasiões.

A Serralheria da Fazenda Ipanema, conhecida como Real Fábrica de Ferro de São João de Ipanema, fundiu seu primeiro ferro em 1816 e funcionou até 1895. Abaixo, uma foto de 1890.

 

O empreendimento, que pode ser considerado o primeiro empreendimento industrial moderno do Brasil, incluiu uma barragem e uma ferrovia de 4 km ligando as jazidas de minério de ferro à usina. A área é agora um parque nacional e uma atração turística popular. As estruturas do moinho estão intactas, como mostram as fotos abaixo, e podem ser visitadas pelo público.

A localização geográfica do local é mostrada nos mapas abaixo.

José Antonio Moreira, tanto o pai  como o filho, se envolveram ativamente na Fundação Ipanema. O futuro Conde de Ipanema, referido daqui em diante como José Antonio Moreira, se envolveu na  Fundação Ipanema desde cedo e permaneceria ligado aos empreendimentos industriais da metalurgia na primeira onda de industrialização do Brasil durante o regime imperial.

Desde a época da Fundação Ipanema, a família Moreira manteve-se intimamente ligada à corte imperial do Rio de Janeiro. No início da década de 1820, José Antonio Moreira estabeleceu-se no Rio de Janeiro, onde em 1823 casou-se com D. Laurinda Rosa Ferreira dos Santos, filha de um comerciante português do Porto. Ela nasceu no Rio de Janeiro em 1808 e faleceu em Bruxelas em 1881. Tiveram  seis filhos: José Antonio Moreira Filho, o futuro 2º Barão de Ipanema (1830-1899); João Antonio Moreira (1831-1900); Joaquim José Moreira (1832-?); Manoel Antônio Moreira (1833-?); Laurinda Rosa Moreira (1837-1920); Mariana Rosa Moreira (1842-?) e Francisco Antônio Moreira (1845-1930). Francisco Antonio Moreira é meu tataravô.

José Antonio casou-se com uma das famílias mais ricas do Rio de Janeiro imperial. Seu sogro era José Ferreira dos Santos, um comerciante de grande destaque. Uma pesquisa recente do professor de história da UCLA William Summerhill revela que José Ferreira dos Santos foi membro da Junta Administrativa da Caixa de Amortização de 1840 a 1846. Os membros desta comissão parlamentar – “capitalistas nacionais… e os maiores detentores da dívida nacional” – supervisionaram as operações do Tesouro para garantir o pagamento das obrigações da dívida soberana. O próprio José Antonio fez parte desta comissão de 1859-1869. Durante esse longo período de prosperidade sob o imperador Dom Pedro II, tanto José Antonio quanto seu sogro estavam entre os maiores detentores de títulos do governo, as chamadas “apólices”, no que era um mercado altamente concentrado. (Summerhill fornece um relato fascinante das finanças do Império em seu livro Revolução Inglória. Esse período prolongado é único na história brasileira pela credibilidade impecável do estado brasileiro.)

O sucesso de José Antonio como empresário e financista e seu serviço à Corte Imperial foram reconhecidos em inúmeras ocasiões com as mais altas condecorações : Comendador da Imperial Ordem de Cristo e Dignitário da Imperial Ordem da Rosa, 1845; Baronato de Ipanema,1847; Grandezas de Barão de Ipanema, 1849; Viscondado com Grandeza de Ipanema, 1854; e Conde de Ipanema, 1868. A associação de José Antonio com a Siderurgia e Metalurgia de Ipanema fica clara pela escolha do nome Ipanema. (Títulos imperiais de nobreza eram concedidos com base no mérito e serviço à coroa e, geralmente, não eram hereditários.)

Os escudos heráldicos dos Moreiras portugueses e dos Ipanemas brasileiros estão ilustrados abaixo. Repare que ambos os escudos têm a cruz florida, que em Portugal era o símbolo dos Cavaleiros de São Bento de Aviz, ordem de cavalaria fundada em 1146. O escudo de Ipanema também tem uma linha azul com cinco estrelas (representando o Rio Ipanema) e um Caduceu de Hermes (que representa a sabedoria).

Em 1844, durante o reinado de D. Pedro II (1831-89), o Brasil adotou políticas de promoção da industrialização e substituição de importações de produtos manufaturados, incluindo tarifas rígidas de até 60% sobre as importações. Antes dessa reforma, o país dependia amplamente de importações britânicas. A mudança de política resultou na primeira onda de industrialização do Brasil, que teve como principal empresário Irineu Evangelista de Sousa (Visconde de Mauá). José Antonio Moreira foi um dos primeiros sócios de investimentos e conselheiro do Visconde de Mauá. Evidentemente, José Antonio fez bom uso de suas conexões com a corte imperial  e seu expertise em metalurgia nesse período, e coinvestiu com o Visconde de Mauá em empreendimentos siderúrgicos, estaleiros, bancários, de barcos a vapor e ferroviários.

José Antonio Moreira foi o primeiro presidente do Banco do Brasil, um empreendimento de Visconde de Mauá, que foi crucialmente importante no financiamento da industrialização inicial do Brasil e que ainda hoje, desempenha um papel vital na economia brasileira. Curiosamente, nos documentos de afretamento da fundação do Banco do Brasil, José Antonio é descrito como um “empresário nacional envolvido no negócio de navios e generos nacionais”.

José Antonio também fez parcerias comerciais com investidores estrangeiros, incluindo empresas siderúrgicas na Bélgica. A partir de meados da década de 1850 José Antonio se envolveu com Bruxelas, e em 1860 sua esposa, D. Laurinda Rosa Ferreira dos Santos, passa a residir lá. A partir desta época, quatro de seus seis filhos se estabelecem em Bruxelas: Manoel Antonio, Mariana Rosa, Laurinda Rosa e Francisco Antonio Moreira. Manoel permanece em Bruxelas, onde serve como cônsul geral do Brasil, e seu filho, Alfredo de Barros Moreira, se torna o primeiro embaixador do Brasil na Bélgica.

Temos dois retratos de José Antonio. O primeira é um esboço dele quando jovem; o segundo, datada da década de 1860, mostra-o no auge.

Na fase final de sua vida na década de 1870, José Antonio Moreira compra uma propriedade localizada a cerca de 12 km ao sul do centro da cidade do Rio de Janeiro. Essa área com mais de 3 km de praia de frente para o Atlântico é hoje conhecida como o bairro da Praia de Ipanema.

A propriedade foi comprada em 1878 e inicialmente usada como casa de campo (chacara). Abaixo, uma representação artística da área na década de 1870 pelo pintor Eduardo Camões (n. 1955- ).

O mapa abaixo mostra a propriedade no contexto do Rio de Janeiro atual. A “chacara” se estendia da ponta sul da Praia de Copacabana (delineada pela atual Rua Barão de Ipanema) até o canal que liga o oceano à Lagoa Rodrigo das Freitas e cria a divisão entre os bairros de Ipanema e Leblon. A propriedade se estendia por partes do atual Leblon, incluindo o atual local do clube esportivo Monte-Libano.

O terreno adquirido por José Antonio Moreira era conhecido na época como “Praia de Fora de Copacabana”, que fazia parte de uma área maior chamada “Fazenda Copacabana”. A maior parte da propriedade foi comprada de um empresário francês, Charles Le Blond, dono de uma operação baleeira chamada “Alianca” que detinha o monopólio de abastecimento de óleo de baleia à cidade do Rio de Janeiro.  Le Blond faliu na década de 1860 quando o Visconde de Mauá introduziu iluminação a gás à cidade do Rio de Janeiro, e isso foi o provável motivo pela venda do imóvel. Os vestígios da operação baleeira de Le Blond incluem os nomes dos bairros da Praia do Leblon e da Praia do Arpoador, no ponto mais leste da Praia de Fora. O promontório rochoso que separa a Praia do Arpoador de Copacabana teve um papel importante na operação baleeira como um mirante ideal para detectar grupos de baleias migratórias.

A área era originalmente ocupada por índios tamoios e, brevemente, na década de 1550 o local de um posto militar francês. Conta a história que um antigo governador português erradicou a população indígena, fornecendo-lhes cobertores infectados com varíola (aparentemente uma prática comum no século XVI).

As partes sul e oeste da Fazenda Copacabana também foram amplamente utilizadas para grandes moendas de cana-de-açúcar e pastoreio de gado dos séculos XVI a XIX na área que se estende do Leblon ao Jardim Botânico. A parte leste da Fazenda Copacabana (atual Copacabana e Ipanema) era imprópria para a agricultura por causa do solo arenoso e ácido (restinga) e, no caso de Ipanema, inundações frequentes da lagoa. Uma das poucas construções na  região era a Igreja de Nossa Senhora de Copacabana,  um convento carmelita erguido no início do século XVI. O convento continha uma cópia de uma estátua da Virgem Maria da Igreja de Nossa Senhora de Copacabana às margens do Lago Titicaca, no Peru, que se dizia ter qualidades milagrosas; e daí o nome da praia.

Muito provavelmente, a compra da propriedade da Praia de Fora foi realizada como uma aposta especulativa imobiliária com grandes perspectivas futuras. Empresário de destaque, ligado ao Visconde de Mauá e à administração imperial, o Conde de Ipanema conhecia os planos de desenvolvimento urbano da cidade. No centro dessa visão estava a Companhia Ferro-Carril Jardim Botânico, empreendimento do Visconde de Mauá, que planejava expandir suas trilhas de bondes para as praias do sul do Rio de Janeiro. Com certeza, estava a par da moda europeia em meados do século XIX de frequentar resorts praianos, tornados possível pela expansão de ferrovias e por uma crescente valorização dos benefícios do mar à saúde. Infelizmente, o Conde faleceu em 1879, deixando o futuro desenvolvimento da área nas mãos de seu filho mais velho.

José Antonio Moreira Filho tinha 49 anos quando seu pai faleceu. Parece ter sido um empresário de sucesso por conta propria e muito estimado pela Corte Imperial, tendo sido condecorado em várias ocasiões: Comendador da Ordem Militar de Cristo e da Ordem de Nossa Senhora da Conceição de Vila Vicosa (o prêmio dado pelo soberano por serviços prestados à Casa Real). Recebeu  o baronato por decreto em 1885 e a grandeza por decreto em 1888. Em 1856 casou-se com D. Luiza Rudge (1838-1891), filha de George Rudge e Sofia Maxwell. Seu sogro era Joseph Maxwell (1772-1854), um dos homens mais ricos do Brasil, fundador da casa de corretagem Maxwell Wright, um estabelecimento comercial com fortes ligações aos mercados americano e britânico e um dos principais participantes do boom de exportação do café, assim como um facilitador do comércio do triângulo atlântico (importação de grãos e produtos manufaturados na América, exportação de café, e comércio de escravos da África). Os Rudges eram parceiros de negócios de Joseph Maxwell. As duas familias Rudge e Maxwell eram originalmente comerciantes de Gloucester, Inglaterra. José Antonio Filho e Luiza Rudge tiveram cinco filhos – Carlos, Luiza Sophia, José Jorge, Carlos Alfredo, Laurin Rosa e Sophia, Emília – todos assumiram o sobrenome Ipanema de Moreira e viveram suas vidas no Rio de Janeiro.

Abaixo, o único retrato que temos de José Antonio Filho  feito na década de 1870, antes de se tornar o Barão de Ipanema.

Temos também uma pintura dos dois filhos mais velhos, Carlos e Luiza, posando em uma rede em Ipanema com a Lagoa Rodrigo da Freitas e o Pico da Catacumba ao fundo.

Os planos de José Antonio Moreira Filho para a “Praia de Fora” dependiam da melhoria do acesso às praias do sul. Durante a década de 1880 o acesso à  região era feito por turistas ocasionais principalmente pelo mar. Isso mudou quando, em 1892, a Companhia Ferro-Carril Jardim Botânico inaugurou o Túnel de Copacabana (hoje Alaor Prata), ligando a Praia de Botafogo à Praia de Copacabana e fornecendo serviço de bonde entre o centro do Rio e as praias do sul. Uma linha de bonde cobrindo toda a extensão da praia de Copacabana foi concluída no início de 1894.

Antecipando a ampliação do serviço de bondes, foi oficialmente lançado  em abril de 1894 o projeto de incorporação imobiliária da Vila Ipanema. Os terrenos de Copacabana e Leblon não foram incluídos na Vila Ipanema, e não se sabe se foram doados à prefeitura ou incorporados a outros empreendimentos em promoção na época.

O layout da Vila Ipanema pode ser visto nos dois documentos abaixo. O primeiro, datado de 1894), é o projeto urbanístico original encomendado a Luiz Rafael Vieira Souto, engenheiro-chefe da Prefeitura do Rio de Janeiro. O segundo, de 1919, é de um folheto de marketing.

A Vila Ipanema dividiu a área em 45 blocos. Cada bloco padrão era dividido em 40 lotes, cada um medindo 10 metros por 50 metros. Foram lançados no mercado mais de um milhão de m² de imóveis.

O lançamento inicial incluia 19 ruas e duas praças públicas (General Osório e Nossa Senhora da Paz). A maioria dos nomes das ruas homenageava parentes, associados e aliados políticos do Barão e seus parceiros. Por exemplo, a via principal na época do lançamento era a Rua 20 de Novembro (atual R. Visconde de Pirajá), que comemorava a data de nascimento de D. Luiza Rudge. Dos nomes originais restam poucos: R. Alberto Campos (cunhado) permanece; Avenida Vieira Souto, em homenagem ao urbanista, ainda enfeita a orla.

José Antonio Moreira Filho teve vários sócios na Vila Ipanema: Coronel Antonio José Silva, José Luis Guimarães Caipora e Constante Ramos. O Coronel incorporou o terreno que possuía na Praia de Fora ao projeto Vila Ipanema. Em 1901 os acionistas da Vila Ipanema eram os seguintes: a família Ipanema de Moreira, 90%; E. de Barros, 6,5%; Coronel Silva, 3,5%; Ulisses Vianna, 1,0%.

A sorte de José Antonio Moreira Filho parece ter se esgotado em seus últimos anos. Vila Ipanema foi lançada quando estava com 64 anos e com problemas de saúde. Dada sua intimidade com a corte imperial, a deposição de Pedro II em 1889 e seu exílio em Paris podem ter prejudicado seriamente seus negócios. Certamente, quando o conde adquiriu a propriedade, não havia previsto o fim do regime imperial. A proclamação da Primeira República em 1889 foi seguida de instabilidade política e crise econômica, e a fuga de capital humano e financeiro. Nos cinco anos após o golpe de Estado que derrubou D. Pedro II até o lançamento da Vila Ipanema em 1894, o real, a moeda brasileira, perdeu 60% de seu valor em relação ao dólar americano, e perderia outros 40% até se estabilizar em 1899. A década de 1890 também veria a ascensão de São Paulo como o centro econômico dinâmico do Brasil e o polo de atração para ondas de imigrantes italianos e japoneses.

Em meados da década de 1890 quase toda a família Ipanema de Moreira se instalou na Europa, mais especificamente em Paris ou Bruxelas. O Brasil, por sua vez, se tornou uma memória distante. Com o falecimento do Barão em 1899, o controle majoritário da Vila Ipanema passou para seu filho Francisco Antonio Moreira que residia em Paris, tendo se mudado do Brasil havia 40 anos.

O seguinte relato do filho de Francisco Antonio (sobrinho do barão), Alberto Jorge de Ipanema Moreira, dá um um pouco de cor à história:

“Na primavera de 1898 viajamos para o Rio, meu pai, minha tia e eu. Meu pai e minha tia foram tentar resgatar o que restava de uma fortuna brilhante.  Seu irmão e também procurador, o Barão de Ipanema, estava velho e doente e seus negócios haviam falido. A única coisa que restara eram as imensas terras em Copacabana e a “Praia do Arpoador” agora rebatizada de “Vila Ipanema”. Após a morte do Barão de Ipanema, foi feito um acordo entre seus herdeiros de um lado e meu pai e minha tia do outro, de que as terras que haviam sobrado para venda seriam divididas da seguinte forma: 35% para os herdeiros e 65% para meu pai e minha tia. Embora nascidos no Rio, meu pai, minha tia e minha mãe – ela de descendência inglesa, Rudge por parte de pai e Maxwell por parte de mãe –pouco conheciam o Rio, tendo sido enviados ainda muito jovens para estudar na Inglaterra.  Tinham pouca noção dos ativos que possuiam no Brasil.”

Franciso Antonio Moreira, meu tataravô, era um bon vivant que desfrutava da boa vida entre Paris e Nice. Era casado com D. Maria Tereza Rudge, a segunda filha de Joseph Maxwell. Pressupostamente, ambos eram herdeiros de grandes fortunas. No entanto, parece que eles viveram muito além de seus meios consideráveis. Seu filho Alberto Jorge conta mais:

“Era de se supor que esse acordo familiar seria muito favorável para meus pais. Não foi bem assim; muito pelo contrário, viveram os trinta anos seguintes recebendo apenas migalhas. Este grande capital foi se esvaindo e serviu apenas para cobrir as despesas mais básicas e indispensáveis. Os lotes de Ipanema vendiam mal, e meu pai queria vende-los a qualquer preço. Ele nasceu um grande senhor e não tinha noção de economia. Muito elegante e garboso, gostava muito de esportes, especialmente a cavalo; generoso, extremamente caridoso e de uma retidão incomum, não via o mal em nada e não havia sido educado para administrar uma fortuna”.

Francisco Antonio teve seis filhos: Alberto Jorge (diplomata brasileiro), Maria Luiza minha bisavó que se casou com Eugene Robyns de Schneidauer, diplomata belga, Leonora, Maria Thereza e José. Todos residiram e faleceram na Europa. A primeira foto mostra Francisco Antonio por volta de 1900 em trajes cerimoniais da corte. A segunda é um retrato da família feito em 1929, perto do final de sua vida, com ele sentado no meio, ao lado de sua esposa.

As fotos a seguir mostram a Praia de Ipanema na virada do século 19 e em 1930. Observe como ainda era pouco desenvolvida em 1930, ainda com paisagem de restinga.

As vendas dos lotes da Vila Ipanema ocorreram de forma muito lenta, pois ninguém queria investir naquele “fim de mundo”. Isso se deveu em parte à concorrência de desenvolvedores na Praia de Copacanana, onde haviam muitas ofertas com maior proximidade ao centro da cidade e do transporte público. Além disso, embora Ipanema e Copacabana fossem comercializados como “saudáveis ​​e higiênicos”, Ipanema era assolada por enxames de mosquitos quando a lagoa inundava periodicamente.

As vendas fracas também foram causadas pelo atraso na expansão do serviço de bondes, que chegou à Praça General Osório apenas em 1902. Até o final daquele ano, apenas 112 lotes haviam sido vendidos, o que representava apenas cerca de 6% do estoque disponível.

As despesas de desenvolvimento também sairam fora de controle. As despesas de capital, administrativas e de vendas ainda ocupavam mais de 60% das receitas no início de 1900. Devido aos altos custos de construção, em 1905 passou-se o trabalho de desenvolvimento para uma empreiteira, a Companhia Construtora de Ipanema, que havia feito trabalhos semelhantes em Copacabana e Leblon. Em 1906, esta empresa completou os taludes da lagoa, dando uma solução permanente às inundações.

A tabela abaixo mostra o fluxo de receita de vendas da Vila Ipanema de 1900 a 1930, época em que restavam poucos lotes. Esses números são apresentados em dólares americanos de 2020, ajustados pela inflação e pela depreciação da moeda. O real perdeu metade de seu valor nesse período. O pico das vendas ocorreu entre 1911-1915, período de pujança econômica e valorização do real. A evolução do real de 1984 a 1930 é mostrada no gráfico a seguir.

 

Nesse período de 30 anos, a receita bruta total da Vila Ipanema foi de US$ 15,1 milhões (USD constante em 2020). A receita líquida após todas as despesas foi de US$ 12 milhões, dos quais US$ 6,5 milhões foram para meu tataravô, Antonio Francisco Moreira. Na época de sua morte, em novembro de 1930, restava apenas uma pequena fração desse capital.

É claro que, em retrospecto, é fácil dizer que esse capital foi grosseira e irresponsavelmente dilapidado. Ipanema hoje é um bairro de luxo e um apartamento à beira-mar na Praia de Ipanema pode custar de 3 a 4 milhões de dólares. Inquestionavelmente, a melhor estratégia para um investidor de longo prazo teria sido construir um grande muro ao redor da propriedade e esperar.

No entanto, até as ultimas décadas mais recentes, a realidade é que Ipanema permaneceu um bairro pacato e distante, principalmente se comparado a Copacabana. Foi apenas na década de 1960 que começou a virar  um lugar de moda. Desde a década de 1960, o centro social e cultural do Rio de Janeiro deslocou-se rapidamente para as praias do sul, levando a uma grande valorização imobiliária.

Quando a família de Antônio Carlos (Tom) Jobim se mudou para Ipanema em 1933, foi porque sua mãe, recém divorciada, não tinha condições de morar em um bairro mais abastado. Por esse mesmo motivo, uma onda de imigrantes se estabeleceu ali depois da Segunda Guerra Mundial.

Na década de 1960, a geração de Antonio Carlos Jobim tornou Ipanema famosa com a Bossa Nova. Foi da esplanada do Bar Veloso na Avenida Prudente de Moraes que Jobim avistou a “menina de Ipanema”, Helô Pinheiro, voltando da praia para casa de biquíni, e o resto é história.

Existem milhares de covers da Garota de Ipanema; a mais recente de  Anitta.

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