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HSBC, which knows a thing or two about the world, and about Brazil, is bailing out of Brazil.
It's unloading its "entire business in Brazil," it said this week, including retail banking and insurance. It will hand its long list of wealthy clients and over 21,000 employees to Bradesco, one of the largest private banks in Brazil, for $5.2 billion. Too much? Bradesco's stock has since plunged over 9%.
Once the deal gets regulatory approval and closes, HSBC is out of Brazil. "The transaction represents a significant step in the execution of the actions announced during the Investor Update on 9 June 2015," it said. After that update, Reuters had described HSBC's motivations with these choice words:
For shareholders, betting on Brazil was risky as lenders grapple with tax hikes, weak credit demand, rising defaults, and the impact of what looks likely to be the country's worst recession in over two decades.
The seventh largest economy in the world in 2014, according to the World Bank, is spiraling down, with private sector output, as Markit put it, falling at the "sharpest pace since March 2009."
This is how Markit titled its Brazil Services PMI report on Wednesday: "Service sector activity drops at joint-fastest rate in survey history."
The index hit 39.1 in July (50 is the dividing line between contraction and expansion), the fifth month in a row of contraction, with all sub-sectors in the survey "registering substantial falls in business activity."
To add to the toxic mix, costs soared, with the rate of increase reaching an 81-month high, third fasted in survey history, due to "inflationary pressures, exchange rate factors, and client fee adjustment." No green shoots in the immediate future: new orders fell for the fifth month in a row. The "deteriorating operating environment" caused the pace of job losses to accelerate "to a survey record."
Some companies still nurtured glimmers of hope: 29% of them expected activity to be higher in one year, based on the notion that the economy would somehow recover "in the coming months."
This gloomy report on the service sector came on the heels of Markit's Manufacturing PMI report, which had inched up to a less dreadful 47.2 in July, but remained "among the lowest since 2011, reflecting a slumping economy."
Thomson ReutersBrazils President Rousseff gestures during a Summit of Heads of State of MERCOSUR and Associated States and 44th Meeting of the Common Market Council in Brasilia
There too were some glimmers of hope, such as the "stabilization" of export orders and slower rates of declines in some categories, but mostly it was unadulterated gloom:
"Brazil's manufacturing slump extended to July." New orders and production were in contraction for the sixth month in a row, "with tough economic conditions being widely cited by survey respondents." Companies tried to control their ballooning costs by shedding jobs.
And they cut their purchases for the sixth month in a row, and did so at an accelerating pace as "operating conditions continued to deteriorate." This led to a decline in inventories for the seventh month in a row. Markit:
Sub-sector data highlighted broad-based declines in new orders, output, buying levels, and employment, with contractions noted across the three monitored market groups. The worst performing category in July was capital goods. Latest data pointed to a ninth consecutive monthly increase in cost burdens faced by Brazilian goods producers.
While services companies and manufactures were able to raise selling prices on average to deal with inflationary pressures, they couldn't do so enough as "strong competition restricted some firms' pricing power." Hence more cost cutting where they could: In the private sector overall, job shedding "accelerated to the quickest since April 2009."
Markit concluded that the "overall scenario" was "bleak":
The survey indicates that the combined output of the manufacturing and service sectors suffered the largest fall since early-2009. Weak demand, high interest rates, fiscal tightening, strong inflation, and rising unemployment are expected to continue to hamper activity in forthcoming months.
These references in both reports to the trough of the Financial Crisis and to data that is the worst "in survey history" make for a chilling read. Brazil's economic problems run deep; and a good part - as in most countries - are home-brewed....
On Wednesday, five construction-company executives were sentenced to years in the hoosegow for their role in a vast bribery and corruption scandal involving state-controlled oil company Petrobras, Brazil's largest company and former crown jewel, now a teetering over-indebted colossus. Three other construction company executives were sentenced last month. The scandal has been exploding relentlessly for over a year. Petrobras suppliers have been dragged down. Nearly 50 politicians are being investigated as the heat moves closer to President Dilma Rousseff, whose approval rating in the most recent poll plunged to 8%.
And the Brazilian real dropped to $0.2829, the lowest since 2003, down 35% from a year ago.
Perhaps it's possible to clean up the way business got done. But the financial uncertainty and upheaval is wreaking havoc on the economy. HSBC must have seen that this wasn't just a short-term blip, something that would blow over in a few months. It must have had visions of corporate defaults cascading through the banking system. Perhaps it imagined the possibility of other un-pleasantries that could get very costly for a bank. At any rate, it got out at a big valuation while it still could.
Brazil is the B in BRICS, a concept that Wall Street hyped for years to the nth degree. The C in BRICS is running into trouble too, with visions of a "downward spiral." Read... The Unnerving Thing Global Automakers Just Said About China's Economy
Read the original article on Wolf Street. Copyright 2015. Follow Wolf Street on Twitter.
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Bill Gross, money manager at Janus Capital Group Inc., said the global economy is "dangerously close to deflationary growth."
Once there is a "whiff of deflation, things tend to reverse and go badly," Gross said Friday in a Bloomberg Radio interview with Tom Keene. Gross pointed to how the CRB Commodity Index isn't just at a cyclical low, but lower than in 2008 when Lehman Brothers Holdings Inc. went bankrupt.
Full Interview: Bill Gross Sees 25 Basis-Point Fed Rate Rise in September
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HEMMER: Senator Lindsey Graham, you worked with Democrats and President Obama when it came to climate change, something you know is extremely unpopular with conservative Republicans.
How can they trust you based on that record?
GRAHAM: You can trust me to do the following: that when I get on stage with Hillary Clinton, we wont be debating about the science, well be debating about the solutions. In her world, cap and trade would dominate, that we will destroy the economy in the name of helping the environment. In my world, well focus on energy independence and a clean environment.
When it comes to fossil fuels, were going to find more here and use less. Over time, were going to become energy independent. I am tired of sending $300 billion overseas to buy oil from people who hate our guts. The choice between a weak economy and a strong environment is a false choice, that is not the choice Ill offer America.
In 2010, Graham supported a cap-and-trade bill, alongside Sens. John Kerry (D) and Joe Lieberman (I). Presumably he did not think it would destroy the economy in the name of helping the environment.
Also, its unclear why cap and trade would dominate under a Clinton administration. Theres no way she could persuade the GOP House to pass a comprehensive cap-and-trade bill, so mostly what shell be able to do is defend EPAs Clean Power Plan, in which cap and trade plays only a minor role, as one compliance mechanism among many.
Graham has not said what his alternative solutions to climate change would be, though hes apparently ready to debate them with Clinton.
As for fossil fuels, find more here and use less is precisely the strategy Obama has pursued. Under his administration, US oil production has boomed and US oil consumption has, for the first time in a half-century, leveled off and begun to decline. As a result, under Obamas watch, for the first time in 20 years, the US produces more oil than it imports from other countries.
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Since 2013, forecasts of the Chinese economy have been pointing to a slowdown of an economy to less than 7 percent. In accordance with this real change, a large outflow of funds of around $450 billion began to occur over the last four quarters since June 2014. Keen to raise Shanghai's status as a financial center for the world and promote greater participation in the windfalls, the Chinese government began to encourage margin trading. The result was a surge in retail margin trading from 400 billion Yuan in June 2014 to 2.2 trillion Yuan by June 2015 (according to Vox) and the "unreal" stock prices then soared by 150 percent. Even well-intentioned, misguided actions can have disastrous consequences, and the next day the correction began to align the "unreal" to the real economy.
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The data on the economy has been mixed of late, and the price of gold has tanked again. In what follows, I try to analyze these trends.
The US Economy
US GDP growth of 2.3 percent in the second quarter appears, at first glance, disappointing. But given the very significant headwinds in the manufacturing sector (recession in the oil and gas industries), the strong dollar, and falling worldwide demand which has played havoc with exports, the GDP growth takes on a more favorable light.
To paint a clearer picture of worldwide demand, the manufacturing indexes in China, South Korea, Taiwan, Malaysia, and Indonesia are all showing contraction. Remember, while the media emphasizes the US manufacturing sector data as if it represented the entire economy, the fact is that manufacturing represents only about 13 percent of GDP.
We have also recently seen contradictory indications for consumption going forward. For example, July consumer confidence fell dramatically in both major surveys. Yet despite falling sentiment, in Q2, consumption actually grew 2.9 percent! And in July, the ISM Non-Manufacturing business survey blew the consensus estimates out of the water. July's reading came in at 60.3, one of the highest readings in the history of the survey (above 50 means expansion). And Friday's employment report (215,000 new jobs) was strong. Clearly, businesses are seeing things differently than the pollsters.