Sprint to the Finish

I love watching all the Olympic competitions, but the 4×100 meters relay is definitely one of my favorites.

It all comes down to one single moment: the passing of the baton! If it falls, is all over! The dream of an Olympic medal goes down the drain.

The recent “economic recovery” in the U.S. is a lot like a sprint relay. But the stakes are much higher. Here in the U.S., there are only two runners: the U.S. government and us – the consumers.

Globally, there are much stronger competitors in this sprint relay. They are not only pulling ahead of the U.S. in the race; they are leading the charge to the finish line. More on that in just a moment. Let’s focus on the U.S. first…

The Relay to Recovery in the U.S.

The race for economic survival started with the U.S. government pumping liquidity into the market to keep the economy afloat. The public sector has been carrying the baton ever since. And it seems to be doing a very good job.

The only problem is the government is not in this sprint relay alone. It has a very weak partner who will soon have to take center stage.

Government stimulus and swings in inventory were the only reasons why we had positive GDP in the third quarter. When you take those two factors away, there’s simply no real recovery in the U.S. at all.

The Fallout from Economic Armageddon

When the housing bubble burst, most companies aggressively cut inventory. After all, they were preparing for an Armageddon scenario.

The shelves were so empty, that a very small improvement in demand led to a pick up in manufacturing activity. But when the manufacturing data in the U.S. fell unexpectedly, this latest disappointment indicated this “restocking cycle” is coming to an end.

When this happens, you can finally see that the U.S. government is running with an extremely poor competitor that looks to drop the baton soon.

Even worse, the government will have to start unwinding its expansionary economic policies soon. Consumers will be put to the test of taking control over the economic recovery. And that’s where the biggest risks lie.

Another Example of Government Failure…

Another Example of Government Failure…

The end of cash for clunkers is the most recent proof of what removing government policies can do. After the cash for clunkers expired, new motor vehicle sales in August tied the record for the second worst month in 28 years!

It will all come down to that single moment of passing the baton. And the battered American consumers might just be too weak to take hold of it.

Who’s Winning the Race to Recovery

As a native Brazilian myself, I was really happy to learn that the 2016 Olympic Games will take place in Rio.

But this is just one of many ways that Brazil has dominated over the U.S. lately. As I mentioned, there are plenty of countries worldwide that are pulling ahead in the race to recovery, and Brazil is definitely on that list.

In fact, the strength of the Brazil’s recovery has surprised even the most optimistic investors. For the better part of 2009, Brazil’s stocks, currency, export sector, manufacturing, even unemployment have improved drastically.

As you heard from Ashish yesterday, the Brazilian real has gained so much versus the dollar lately that Brazil’s Ministry of Finance placed a 2% tax on capital inflows to try to slow down the real’s rise. You don’t resort to such drastic measures unless you believe sustained growth will continue in both the country and currency.

Indeed, the prospect for stronger growth in Brazil will continue regardless and still attract more foreign capital inflows. That should boost the value of real even more long-term.

Besides that, Brazil will most likely raise rates before the U.S., increasing the incentives to sell dollars to invest in the higher yielding real. So the real still has more room to appreciate against the greenback.

Bottom line: In the race to economic recovery, there are clear winners and losers. For now, Brazil is winning, while the U.S. falls behind.

Best Regards,
Evaldo Albuquerque

About the Author: Evaldo Albuquerque is one of the latest additions to our currency team here at World Currency Watch. An MBA, he spends his days monitoring every minor pip of the exotic and major currency markets. Evaldo is also co-editor of Exotic FX Alert, a Forex service that focuses exclusively on recommending the next big winners in the exotic Forex market. You can contact Evaldo at info@worldcurrencywatch.com.

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