Brazilian Inflation’s Back. Broken

Brazilian YoY CPI 2.89%, slightly below expectations. BCB’s 2021 inflation target is 3.75%… 3.5% in 2022.

After USDBRL goes from 3.25 to 4.10 in 18 months too.

That’s what 2-decade high unemployment and an almost 4-year recession does to Brazilian CPI, together with Labor Reform and some de-reg.

Forwards implying another 100bp cut from current CDI/Selic effective levels.

Largest beneficiaries few talk about:
– Public debt service will implode as ~50% has maturity under 3 years, with a large part of it being floaters (LFTs)
– Brazilian version of “TINA”, “NOPPM?!?”… “Not one-percent per month!?!” (LOL!) brazilians got so used to, will help shift into different financial products, deepening capital markets.
– Good for entrepreneurs, hard workers!
– Lower cost of capital is finally allowing investment in productive capacity instead of in unskilled labor, in my view a large productivity boost.
– Lazy wealthy will have to come forward.

Cons:
– Hurdle for capital allocation goes down… more incentives for capital misallocation longer-term

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Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.