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BRAZILIAN ELECTIONS IN OCTOBER

BRAZILIAN ELECTIONS IN OCTOBER

We believe that it is important that the new Brazilian administration continue the many successful programs that flowed from the Lula government. Currently, Dilma Rousseff, Lula’s hand picked successor is enjoying a 20 point lead over her opponent Jose Serra according to one Sao Paulo newspaper. Should Rousseff win, will she be able to continue along the path blazed by Lula?
Brazil has prospered this past decade for a variety of reasons. After Lula’s election in 2002, a fortunate confluence of good national economic management, strong industrial production, strong exports, and relatively moderate inflation [by Brazilian standards] created increases in the standard of living for many Brazilians.
Lula’s policies have been more centrist than leftist. Brazil has enjoyed a surge in demand for products and raw materials from Asia. They have experienced a calming of inflation as a result of moderate monetary and fiscal policies, and have also enjoyed some luck as the world experienced a dis-inflationary trend at the same time. These combined events have led to strong economic growth, large increases in auto and home ownership, improvement in infrastructure build out, and an expansion of the already strong auto, aircraft and computer industries.
Brazil’s successes have had significant positive influence on the world and especially on Latin America. Brazil’s future trends will be heavily influenced by the October 3rd election and the psychology of Brazilian and global investors that result from the election.

Lula’s centrist path caused interest rates to decline. The decline allowed the purchase of autos, homes, and other goods by Brazilians, which of course stimulated economic growth and raised more families to middle class status.

U.S. VOTERS, HAVE YOU EVER HEARD OF SCOTT RASMUSSEN?

Mr. Rasmussen is a political pollster. Why have Mr. Rasmussen’s polls been so accurate while other U.S. political pollsters have been quite inaccurate? Why does he see big changes ahead for the U.S. political environment?

Mr. Rasmussen, who has traditionally been seen as a Republican pollster is teaming up with Scott Schoen, a pollster for Bill Clinton to write a book about the new U.S. electorate, and why traditional polling organizations have recently been quite wrong about voters’ intentions. In their book, they discuss how polls have come to dominate political behavior as never before. Politicians watch them and react to them constantly.

They also discuss how both Democratic and Republican pollsters are giving their readers misleading results because “The trade-offs pollsters offer voters often don’t make sense to them. How you frame the question often obscures the result you get.” In other words, the premise behind the question asked often is not shared by those who are questioned.

His surveys poll large numbers of people electronically every night, instead of using less frequent personal interviews of a much smaller number sample like most other pollsters. His track record in calling recent elections has been far superior to other polling organizations. Here are a few points he has discovered about the electorate.

“THE MAJORITY OF DEMOCRATS, REPUBLICANS AND INDEPENDENTS ALL DISAGREE WITH POLITICIANS ON AT LEAST TWO OF THE FOLLOWING THREE QUESTIONS:”

1) “Whose judgment do you trust more; political leaders or the public’s?

2. Has the Federal government become its own special interest group?

3. Do Government and big business often work together in ways that hurt consumers and investors?”

It seems obvious that all types of voters believe that the government does not have the public’s best interest in mind, and as a result they will turn many incumbents out of office in November 2010.

In an interview in the Wall Street Journal on August 21, Mr. Rasmussen said “This will be the third straight election in which the people vote against the party in power.” “The GOP will benefit this year, but 75 percent of Republicans say their representatives in Congress are out of touch with the party base. Should they win big this November, they should move quickly to prove they have learned lessons from the Bush years.”

AUSTRALIAN STALEMATE

The recent Australian election ended in a hung parliament with both the Labor party on the left and the Liberal-National coalition on the right unable to attain a majority. Both sides are now negotiating with independents and other blocs to form a coalition of 76 seats to form a government. We believe it will be much better for Australia and its business environment if the more conservative government is formed. We will watch and comment after a government is finalized.


LONG-TERM BONDS ARE NOT A WISE INVESTMENT IN OUR OPINION

It is disturbing to us when a huge percentage of investors agree that one type of investment is the superior vehicle. We recall the era of 1998 to 2000, when tech stocks could do no wrong and many unsophisticated investors and speculators believed that tech stocks were a one way street to riches. Today, we have a similar mania where 98 percent of investors believe that buying U.S. treasury bonds including long-term bonds is a wise idea. We dispute this idea and strongly warn our readers to watch out.
Long-term bonds in this country are discounting a continuation of a low inflation environment; and we all know that inflation in the U.S. is currently not a problem. How do we know that inflation will not return in the future? Many investors seem to be discounting a non-inflationary or even a deflationary environment for years to come. If inflation were to return, purchasing a 30 year bond at current low interest rates could produce immense losses for the unwary.

We further believe that people are ignoring certain signs. For example, there is high and rising inflation in India and rising inflation in China, Brazil and many other parts of the world. Just as the United States engendered inflation in the 1970’s and exported it to Europe and much of the world, the inflation currently taking place in Asia and elsewhere could easily be exported to the U.S. and Europe in coming years.

We do not agree with buying long duration bonds unless you intend to be a very active short term trader. In our opinion, longer term investors should avoid long duration bonds!


GOLD AND STOCKS

Clearly, the stock markets of the developed world have spoken. They are interested in high yielding stocks with assured and growing income and they are not interested in most other stocks. Gold related shares are the only sector that does not pay high dividends which appears to be doing well in this environment.

Gold itself is acting brilliantly, as continued efforts to hold the price down by those who do not like to see the price of gold rise, are being neutralized by those governments, institutions, and individuals who continue to use every price decline as a buying opportunity. Wise gold investors will use dips to buy.

SUMMARY

Investors should avoid long-term bonds, and continue to focus on using dips to buy gold and high yielding income stocks [especially in the oil sector]. We believe that the recent decline in oil prices has ended, and expect oil prices to rise over the next few weeks and months. Demand for energy from the developing world continues to grow and Saudi Arabia is starting to think more about conserving some of their oil resources for future generations.

China, India, and other growing nations will be well situated for investment, but we prefer to wait to add money to global stock markets until we see how the seasonally volatile September-October time frame unfolds.

Historically, many stock markets, especially in the U.S. and Europe have been very weak in September and into October as investors return from summer holidays. Accordingly, we hold large cash positions and very few equity positions other than high yielding energy stocks or gold stocks in the portfolios.

Thanks for listening.


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