My aunt, and the lure of the Brazilian real

(Reuters) – I haven’t seen my Aunt  Thelma in about 15 years, so imagine my surprise when an email  rolled in on Sunday with the subject line: “Brazilian real.”

“I am considering investing a small amount in the carry  trade,” the email began. And my first thought was: Wow, if  65-year-old retired insurance adjusters in Pottsboro, Texas, are  buying in now, how much longer until this bubble pops?

Sure enough, Aunt Thelma’s email was like a case study on  why Brazil’s currency has appreciated 50 percent since 2009,  and 5 percent in just the last two weeks. She wants to use U.S.  dollars to borrow yen and then set up a short-term account in  Brazilian currency, reaping yields that are far beyond anything  to be had these days in the developed world.

“I hear about a 12-13 percent interest rate in Brazil,” she  wrote. “Any particular caveats for me to be aware of?”

Now, Aunt Thelma (not her real name) is pretty savvy with  money — certainly better than her nephew who, after all, chose  a career in journalism. And there are all kinds of economists  and other Wall Street folks out there who would tell her that  the real, currently trading at about 1.57 per dollar, is headed  next for the 1.50 threshold — due to a nonstop torrent of dollar  inflows from yield-hungry investors just like her.

Yet as somebody who actually lives in Brazil, I see reasons  for caution virtually every day. Indeed, some experts warn that  — to use a phrase from my home state that Aunt Thelma would  understand — this dog won’t hunt for much longer.

For one thing, some prices in Brazil have lost any anchor  with reality. The Big Mac, that handy barometer of  international prices, now goes for $6.20 in Sao Paulo —  compared to $3.56 at a McDonald’s in North Texas. (Thanks for  checking, Mom.) Rent for a three-bedroom apartment can easily  set you back $3,500 a month. Executive pay is now higher than  in New York or London.

The situation is such that Goldman Sachs christened the  real the world’s most overvalued major currency — and that was  last year, before the government decided to give in to an even  stronger currency, and back when I could afford to take my kids  out for more than just cheeseburgers.

CONDOS IN FLORIDA,
AND THE BRAZILIAN REAL

The currency’s strength is in part a product of something  very real — Brazil’s bona-fide emergence during the past  decade as a major economic power and a relatively safe place to  invest. In fact, Brazil’s economy is so robust that it came  through the 2008 global crisis largely unscathed, which is one  reason why it’s attracting so much “hot money” now.

Some economists argue the real will remain strong at least  until the U.S. Federal Reserve starts raising interest rates —  and maybe longer, given Brazil’s popularity among investors as  it prepares to host the 2014 World Cup and 2016 Olympics.

But didn’t the 2008 crisis also teach us that, when prices  for something patently don’t make sense, that’s usually a  pretty sure sign of a bubble? That is, if million-dollar  McMansions in the middle of the Arizona desert were completely  insane in retrospect, then what to make of paying nearly  $50,000 for a simple new four-door Hyundai sedan in Brazil?

Then there is the matter of the Aunt Thelmas of the world.  Virtually every financial bubble in history has been followed  by accounts of the retail investors who got suckered in just as  the game was up. When I covered the Argentine financial crisis  of 2001, it was the poor Italian pensioners who got stuck with  the worthless government bonds. My Texan friends who bought a  Miami condo “as an investment” in 2007 … well, they spend a  lot of time in Florida these days.