Tuesday, July 7, 2009

Well, I’d never thought in a million years that I’d see the day when this could happen. But here it is…

Right now, Brazil’s credit rating is edging higher than California’s debt rating (the United States’ biggest issuer of municipal bonds)!

That’s not all. At the same time when Fitch is downgrading California’s debt rating for the second time within weeks, Brazil is about to get another upgrade!

Last year, I brought the story to you about S&P and Fitch upgrading Brazil’s country to “investment grade” status. However, now it appears that all three major rating agencies may be on board in cheering on Brazil.

In fact, Moodys has Brazil “on review for an upgrade” that could come as soon as October 6th according to the rating agency’s analysts.

This Is Going to Change Everyone’s
Perception of “Risk”

Moodys said they may upgrade Brazil’s credit rating status because of “the country’s demonstrated resilience to shock in the global economy.” Meanwhile, Fitch just came out and said that California is skating on thin ice debt-wise.

As far as I’m concerned, this should change what your average American investor views as “risky” going forward.

Many Americans wouldn’t have paused for a second if they saw an investment opportunity come up in California. After all, California has been one of America’s largest economies and one of its biggest engines for growth and ingenuity for quite some time now.

However, if an “emerging” country warrants a higher rating than that of one of America’s largest economies, then that’s huge! I also find it interesting that Moodys is also considering Brazil’s upgrade due to “the government’s decision to shift away from dollar-linked debt.” Wow!

Think about it. While California just announced that the state will issue its own I.O.U.’s, Brazil is stockpiling a record amount of reserves (to the tune of $209 billion dollars, up from $38 billion as recent as 2003!).

What a turn of events huh? Again, this will create a new precedent for what’s risky. I see many investors walking away from struggling, debt ridden U.S. economies like California and instead rushing for the more “stable” countries abroad like Brazil.

As a currency investor, it’s just one more reason why you should look to drop debt-ridden dollars and look at Brazil’s currency, the real.

How to Dump Your Dollars and Get an 11% Yield

Man, has the world’s view changed towards “dollar denominated debt” or what?

Now you get looked on more favorably if you dodge our debt. Formerly, you’d have been given a pat on the back if you had invested in our “stable” bonds (which aren’t so stable anymore).

Indeed, it’s actually a safer bet to buy Brazil’s debt than California’s debt right now.

But here’s the amazing part: Some of Brazil’s bonds boast an 11% yield because they’ve been viewed as being riskier in the past. Meanwhile, California’s muni bonds don’t come anywhere near these yields (at least not yet), yet you can’t even get paid right now! They’re issuing out I.O.U.’s….right here in the “good ole” U.S.A.!

So you’re actually getting a two-part play off the Brazil’s higher-yielding debt, and possible currency appreciation from a real-dominated investment.

To recap, there are plenty of ways to own the Brazilian real. You can buy into this country through both high-yielding bonds and the currency itself. But the point is a few emerging markets are actually pulling ahead of the U.S. – even large, traditionally U.S. economic growth engines like California.

Like I said, I never thought I’d see the day…

Happy Trading!
Sean Hyman, aka Professor FX