A Nation of Economic Growth, Soccer and Endemic Corruption: The Past and Present Coincide in Brazil's Nationwide Protests

One of my proudest moments as a teenager growing up in Brazil was in 1992 when we took to the streets in nationwide protests that ultimately led to the impeachment of a hopelessly corrupt President, Fernando Collor. That event marked the beginning of a socioeconomic revolution that provided the conditions necessary for Brazil's economy to surge forward in growth and become the 7th largest in the world today.

But as the old cliche goes, the more things change, the more they stay the same. Fast forward 21 years and Brazilians are back on the streets protesting against the same core issues we were demonstrating against two decades ago: rampant political corruption, combined with a glaring lack of government investment in infrastructure, education, and public health.

The immediate catalyst this time was an increase in public transportation fares. While a U$.10 cent raise in bus fares doesn't seem like a significant increase to justify such an outburst, the combination of continued inflation (manifesting itself, to the common man, in the form of constantly increasing prices), endless flow of corruption scandals, and the inexplicable and unjustifiable amounts of money the Brazilian government is spending building soccer stadiums for the upcoming 2014 Soccer World Cup, finally culminated in a series of protests all over the country.

So what are the undercurrents that are driving this new round of protesting? Why are today's protestors so angry with the current government, which has clearly delivered considerable economic growth over the past two decades?

For starters, one could argue that these protests are a direct outgrowth of the increased prosperity that has sparked the emergence of a true middle class in Brazil. By adopting policies that controlled inflation, stabilized the currency and capitalized effectively on a global commodity boom, Brazil's government contributed to higher per-capita incomes, increased consumption, and a budget surplus the nation had never seen before. This new middle class (referred as Class C) is now driving new cars, enjoying new appliances, cell phones, and even buying homes, which were all distant dreams 20 years ago.

Unfortunately, this improvement in personal consumption didn't actually translate in an improvement in the quality of their lives. They have cars now, but the roads are in constantly terrible conditions. They drive to work, but not without being stuck in traffic for literally hours (indeed, Sao Paulo is widely recognized as having the worst traffic in the world). They have new appliances, but their houses get broken in by burglars and the appliances stolen on a nearly routine basis. Drivers keep their windows shut, afraid their cell phones will be stolen at gun point while they are halted in traffic on the streets. As a matter of fact, I have several friends who have prospered over the years in Brazil, who actually have bulletproofed their cars, and cited numerous instances when this precaution proved to be a wise step. Frankly, living in such a fashion is simply not a great way to spend one's newfound prosperity.

The bottom line? People should not be surprised that the ongoing protests that are becoming larger and more intense with each passing day. Brazilians are typically laid-back, friendly people, but we are also very passionate and patriotic. Your average Brazilian today knows all too well what is needed to translate the economic growth over the past two decades into a better society for themselves and all of their fellow citizens: significantly more improvements in infrastructure, greater investments in education and public health, and a much more transparent government.

All of this begs the question of whether the Brazilian government is waking up and smelling the coffee. Right now, that doesn't seem to be the case. The timing of these protests coincides with a soccer tournament Brazil is currently hosting as a warm-up to the World Cup. Japan, Italy, Spain, Mexico, and other soccer powers are competing in brand new overpriced stadiums. Maracana, a landmark soccer stadium was recently renovated for $1.2 billion Reais (U$600 million), one of the most expensive stadiums in the world. Needless to say, every project is over budget by an average of 50% and the construction companies involved in renovating and building these stadiums all have political ties.

To make matters worse, politicians decided to award themselves a significant salary raise (20%) bringing their average salary to $17,000 Reais per month, compared to the $600/month minimum wage many hard-working Brazilians receive or the $900/month public school teachers get.
Viewed within this context, the increase in public transportation fares that supposedly sparked the protests today was simply the straw that broke the camel's back. Brazilians are tired of being taken advantage of by a pervasively corrupted political system. Unfortunately, corruption is ultimately the Achilles heel of many, if not all, developing nations.

Even though many Brazilian stocks are trading near their 52-week lows (PBR, VALE, ABV, GGB , ITUB, BBD), I would not recommend investing in them quite yet. The political and economic risks are too high at the moment. As both a Brazilian and a global investor, I hope these protests will lead to meaningful policy changes, government transparency, and new leadership in the future. I hope I don't have to copy and paste this same article 20 years from now.


Danilo Kawasaki
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405

310-399-6397
www.gerberkawasaki.com


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