“Boldness has genius, power and magic in it.”

This phrase attributed to Goethe is driving my way right now. That's why I'm not writing so often here. I'm glad for the growing visits but I received a great opportunity a few weeks ago and I'm devoting all my free time to it. All that I wanna say is: "if you want something, go for it no matter how long it takes to reach."

Well, I'm already posting something personal so I'll continue it and share with all the visitors a great master piece written by Antonin Dvorak, my favorite artist related to classical music.

I believe every composition made by Dvorak is very powerful, I mean, when I listen to this I feel alive, willing to do everything that I wish to do but I also feel calm, thoughtful and serene...enjoy it. One more detail: I guess this record is not the best one, the one that I have is played by Prague Philharmonic and I believe the spalla is Isabelle Faust.
Finnaly, I would like to share a speak of Jack Abramoff in 'Casino Jack' movie:

"You know, I do a shit load of reading, and studying, and praying, and I've come to a few conclusions i want to share.

People look at Politicians and Celebrities on the TV and Newspapers, glossy Magazines and what do they see? “I'm just like them”. That’s what they see. “I'm special. I’m different. I can be just like them.” Well guess what? You can’t!

You know why? Because in reality, mediocrity is where most people live. Mediocrity is the elephant in the room. It’s ubiquitous. Mediocrity is in your schools, in your dreams. It’s in your family.

Those of us who know this, those of us who understand, the disease of the dull, we do something about it. We do more because we have to, the deck was always stacked against us. You’re either a big leader or a slave, clawing your way onto the seed train.

Some people say Jack Anderson moves too fast, Jack Anderson cuts corners. Well I say to them, if that’s the difference between me and my family having a good life and using public transport everyday then so be it! I will NOT allow my family to be slaves. I will NOT allow the world I touch to be VANILLA!

You say I’m selfish? Fuck you! I give back…I give back plenty.

You say…say I got a big ego? Fuck you twice!! I’m humbly grateful for the wonderful gifts that I’ve received here in America, the greatest country on this planet!

I’m Jack Anderson, and oh yeah, I work out every day."

It is the second time I watch this movie. It is very interesting to see how they persuade people and why it is important to have networking.

Euro Zone GDP Growth - Good or bad news?

Eurostat, the European Union statistical information service released this week a report saying that GDP increased by 0.8% in both Euro Area and the EU27 during the first quarter of 2011, compared with the previous quarter. In 2010, growth rates were +0,3%  in the Euro area and +0.2% in the EU27*.

But, when we look the details at the data, it's possible to see some problems around Europe. Here are some GDP data in some countries:

Portugal: -0.7%

Spain: 0.3%

Ireland: N/D

Greece: 0.8%

Still on Eurostat website we can take a look at the some Long-Term Government Bond Yields:

In spite of Greece had a significant growth in this quarter, the country long-term bond yield is still increasing and it is happening with Portugal as well. Greece is at a difficult situation right now due to 2 main problems. One, how can a country have more austerity if it have to pay almost 13% for an investor (not counting other expenses)? Second, How can a country pay its bills if the economic outlook is now not one of the most attractive? Why do I say that? Jean-Claude Trichet gave signals that may have a rate hike around June. When interest rates goes up, it slows down the economy and it means less economic activity, afecting Greece and Portugal directly. 

We can see at the EUR/USD chart below that this announcement has made euro slide against dollar:

So, if the EUR is getting weak, it means US dollar is getting stronger. In an appreciating dollar environment, issuance of yankee bonds will increase as issuers take advantage of the dollar's increasing purchasing power. Yankee bonds are bonds issued by international companies and sold in the United States.

*EU-27: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.

Ireland Downgrade and ECB interest rate

Nowadays I've been writing about the Euro Zone and how their government decisions impacts on the commodities prices and currency appreciation/depreciation. Today I would like to discuss about another impact, specifically about the Ireland Downgrade to Baa3 from Baa1. First of all, it is necessary to explain what are those notes. There is a table below that is very didactic to learn. Note.: U.S sovereign debt is a triple A.

Moody's		Standard & Poor's		Fitch Ratings		Commentaire
Long terme	Court terme	Long terme	Court terme	Long Terme	Court terme
Aaa	P-1	AAA	A-1+	AAA	F1+	Prime. Sécurité maximale.
Aa1		AA+		AA+		High Grade.Qualité haute ou bonne.
Aa2		AA		AA
Aa3		AA-		AA-
A1		A+	A-1	A+	F1	Upper Medium Grade. Qualité moyenne.
A2		A		A
A3	P-2	A-	A-2	A-	F2
Baa1		BBB+		BBB+		Lower Medium Grade. Qualité moyenne inférieure.
Baa2	P-3	BBB	A-3	BBB	F3
Baa3		BBB-		BBB-
Ba1	Not Prime	BB+	B	BB+	B	Non Investment Grade.Spéculatif.
Ba2		BB		BB
Ba3		BB-		BB-
B1		B+		B+		Hautement spéculatif.
B2		B		B
B3		B-		B-
Caa		CCC+	C	CCC	C	Risque substantiel. En mauvaise condition.
Ca		CCC				Extrêmement spéculatif.
C		CCC-				Peut être en défaut.
/		D	D	DDD	D	En défaut.
				DD
				D

Markets around the globe got concerned this week due to some sovereign problems in Portugal and Ireland. In the beginning of April Moody's downgrade Portugal sovereign debt and now was Ireland's turn. Is there some correlation between Ireland downgrade and ECB interest rate increase? For Moody's, yes.

Moody's says that Irish government's financial strenght may suffer as a result of what may be the first of a series of policy rate increases by the European Central Bank to contain the inflation in euro area. The increase can mean less consumer spending and a strengthening of the euro may negatively affect exports.

Inflation is a big problem for every country around the globe. There is a well-known trade-off. "Do I keep the interest rate low and stimulate the economy or rise interest rate, slowing down the post-recession economy in order to contain the inflation?" Especially after the mortgage crisis this trade-off has been experienced by many countries such as China, Brazil, Euro Zone and some countries in Asia. This is a hard problem to solve and that's why in the previews post I wrote that gold will reach $1.500,00 in the coming months...

Silver and Gold at a new all-time high

When Jean-Claude Trichet reported a quarter-point increase at the benchmark interest rate in Euro Area, gold and silver price reached a new all-time high - silver pushed above $40 a troy ounce for the first time since 1980 and gold to $1474,19. Why did this happen?
Gold and Silver are well known among investor as the safe haven to curb inflation efects. So when the European Central Bank President announced the increase, investors got concerned about the inflation and migrated to those assets.

Country	Interest Rate	Growth Rate	Inflation Rate	Jobless Rate	Government Budget	Exchange Rate
Euro Area	1.25%	0.30%	2.60%	9.90%	-6.30	14200

Furthermmore, the hike on those commodities price this week has also to do with the potencial shutdown of the US Government due to some divergences between Republicans and Democrats. The deal was to cut $100 billion in fiscal spending in 2011 BUT the agreement cuts $39 billion in atual spending, which is $22 billion less than bill the House passed in Feb by President Obama's fiscal 2011 budget request - $78.5 billion.
Analysts and investors now see $1,500 gold and $50 silver as likely to be breached in the coming months, as the potential for looser monetary policy for longer in the US weighs on the dollar. Why?
Commodities are usually priced in dollar, so a weaken dollar boosts raw materials prices and can valorize other currencies such as Real, the Brazilian Currency and the Euro.

Black Swan Events

Hello,

I haven't been posting for a while due to some events that I had to prioritize and unfortunately, but not least important, I had to step the blog aside for a bit. However, it was worth it. I'll start to work for a big brokerage firm here in Brazil in the beginning of April and I'm so happy and excited to start this new path in my career.

In the interval between the last post and this one, a lot of events happened in the world that affected the economics, politics and social fields.

One example of those events are the earthquake and tsunami in Japan a few days ago, an event very difficult to predict because deviates beyond what is normally expected of a situation. Another example is the unrest in the Middle East starting in Egypt spreading to Libya, Tunisia and so on that drove a climb in the oil price above $100 a barrel.

Those unpredictable events are called Black Swan events. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. According to the New York Times, black swan are events with the following attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

Here you can see a series of black swan events and the impacts on the stock market.

Unrest in Egypt

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View the full EGPT chart at Wikinvest

Since Feb. when the riot started to become significant the stock market plunged.

Nikkei 225

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View the full N225 chart at Wikinvest

March 16 - Earthquake and tsunami.

VIX (Volatility S&P500 index)

See the VIX explanation here. 

Currency Carry Trade in Brazil

In the end of 2010 I wrote about the tax on capital inflows here in Brazil. Our country imposed a 2 percent entry tax (the IOF) on inflows to domestic bonds and equity markets on October 19, 2009. Moreover, I was taking a look at the stats of this blog and surged more than 50 search keywords related to "onshore offshore spreads Brazil", the so called carry trade. But, what is that? What are the advantages for the foreign investor? How they do that?

According to Investopedia, Currency Carry Trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

For example, a trader borrows $10.000,00 US dollar from a American Bank, converts the funds into BRL (Brazilian Real) and buys a bond for the equivalent amount here in Brazil. Let's assume the brazilian bond pays 11.25% and the american interest rate is around 0.25 percent. The trader stands to make a profit of 11% (See, I'm not adding the 6% entry tax, If I did that, the trade still can make a big profit) as long as the exchange rate between the country does not change (USD/BRL). 

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Brazilian Real, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately. Still, this trade nowadays has been advantageous for the foreign investor that invest in dollar. Why's that? Brazilian economy growing fast, economic and political stability, government spending is almost under control comparing to developed countries are some indicators that keep the U.S. dollar in this range of 1.60 - 1.70, drecreasing the chances of drastic losses.

Another example of Carry Trade

Below is a chart illustrating a typical example where the carry trade strategy could have been best applied. The chart shows a steady increase of the GBP/JPY pair in 2005 and 2006, spawned, among other things, by carry traders going long to obtain the interest rate differential. 

A carry trader who took advantage of the interest rate differential in the GBP/JPY would have had the following profit, had he/she bought one standard lot of the GBP/JPY at about the same time last year, and decided to sell a year later. 

 

Sources: Fxwords, Investopedia, Brazilian Central Bank.

Warren Buffett's secrets revealed : Buffett & Clark

Mary Buffett, the former daughter-in-law of billionaire investor Warren Buffett, and David Clark, one of the earliest 'Buffettologists', say they revealed Mr. Buffett's investment secrets in their recently published book Warren Buffett and the Art of Stock Arbitrage.

The billionaire Omaha investor returned about 39 percent annually from 1980 and 2003, which is an 

astounding investment feat. However, these numbers look shabby compared to the 81 percent annual returns he achieved with the 59 stock arbitrage deals he did between 1980 and 2003. Clark and Mary Buffett claims this is the secret to Buffett's success.

Stock arbitrage, also known as merger arbitrage, involves buying the shares of companies that are expected to be acquired by another company.

Usually, after an acquisition is announced, the price of the stock jumps close to the acquirer's proposed purchase price. Stock arbitrage, then, is buying those shares and gaining from the eventual convergence to the exact announced purchase price.

The downside risk, of course, is if the deal doesn't go through and the prices drop all the way back to pre-merger announcement levels.For this reason, investors must be very "choosy" when doing these deals, said Mary Buffett, in a phone interview with IBTimes. Warren Buffett was certainly "choosy"; all 59 of his stock arbitrage deals went through.

Mary Buffett said the billionaire investor forgoes the greater returns of buying early in the speculative phase of the potential merger. Instead, he waits until the deal is "certain" to happen before he acts.

Buffett and Clark list the following as the characteristics of the deals that are likely to go through:

*The takeover must be friendly and no large shareholder should oppose it. 

*The acquisition should be made for strategic rather than financial reasons, i.e. a company buying another one because there is synergy rather than a private equity firm buying a company it thinks is undervalued.

*There may also be regulatory considerations. For example, if the two companies together control a large enough portion of a  certain market, regulators may oppose the deal on anti-trust basis.

Buffett and Clark insist stock arbitrage is a good strategy for retail investors. Years ago, it was impractical because of the high trading costs involved. 

Now, with the advent of electronic trading and lower commissions, it's more feasible.

Moreover, to follow the mergers market, one just needs to pay attention to general financial news.  There are also a number of websites that specifically track mergers, so keeping abreast of this market is easier now than ever, said Mary Buffett.

Also, mergers still happen in recessionary times. For example, Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) bought Burlington Northern in late 2009. However, it is not possible for retail investors to achieve Buffett's 81 percent annual returns because they typically can only leverage two times 

for stock purchases.

Warren Buffett returned 81 percent annually by doing about 2.5 deals per year. Assuming each deal returned on average three percent, his leverage was at least nine times. Still, with just two times leverage, investors can make some pretty decent returns.

Assuming Buffett's figure of 2.5 deals per year, with a 3 percent return per deal, and two-times leverage, the expected return would be about 15 percent per year.

Assuming (optimistically) investors do four deals per year (each deal takes several months to finish), leverage two-times, and capture three percent per deal, they would return 24 percent, or about twice the historic return of the U.S. stock market and trumping the performance of most fund managers. Not a bad deal, especially for retail investors.

Incidentally, billionaire hedge fund manager John Paulson and many of the "big guys out of Goldman Sachs" (according to David Clark) started their career in stock arbitrage

by IBTimes

The Interconnected World

The Interconnected World is a film in four parts about the International Monetary Fund and the global economic crisis.

We need better multilateral governance. And if we don’t get it, our children and our grandchildren are going to pay the cost of that.— Mohamed El-Erian, CEO of PIMCO

The four videos discuss how the world economic order is being shaped by the global crisis, the rise of Asia and the implications for the rest of the world, how the discovery of oil is affecting a low-income country in Africa, and the transition of a country in Eastern Europe from communism to a market economy and membership of the European Union.

The IMF was established to foster economic stability and promote peace following the devastation of World War II. This global financial institution has been undergoing rapid change to meet the challenges of the 21st century, and played a vital role in helping countries deal with the international crisis.

Watch here the movie:

The Interconnected World

The Global Outlook in Summary

You can read the full report here.

Repeal Obamacare

REPEAL OBAMACARE (iq2us.org) from Intelligence Squared US on Vimeo.
Watch this debate on Bloomberg Television starting Friday, January 14th at 9PM ET.

In March 2010 President Obama signed into law the Affordable Care Act, the biggest overhaul of our health care system in decades.  According to a November poll from the Kaiser Family Foundation, 40 percent of the public would like Congress to expand the new health reform law or leave it as is, while 49 percent are in favor of repealing all or parts of it.  Can the new law reduce the deficit and expand coverage to millions of uninsured Americans, or, as its critics warn, will it actually increase the deficit and fail to control costs that are spiraling out of control?

Hello everyone.

Today I was watching an interesting debate related to the Obama's health care reform and it was worth watching. There is a predefined theme and there are two groups that one is favor and the other one is against and the mail goal is to try to convince the public of their position.  Although there are a lot of things I could say about this debate, I would like to focus on a question asked by the audience about the government on the influence on people's behavior in relation to change eating habits.
Both of the groups weren't in favor about that question and I almost hit the computer screen. How can they say that? They were just worried about the economic issue of the health problem...
I believe that government must have the obligation to change the people behavior (for better) to improve their quality of life, through this we can prevent a lot of diseases that could happen some day! For example, if the government through the law imposed on business that junk-food enterprises encouraged people to eat a better food, if the government encouraged those business to build a better menu, on the long run I believe that the goverment would spend less on health care because the quality of life would improve and the percentage of some diseases related to bad eating habits would reduce to lower levels. Don't you think we (the entire society) are able to change things?

The Economist Debate: Cities

Today at the The Economist website I was reading a debate related to the growth of cities and 'the house' were saying that resctricting the growth of cities will improve quality of life. However, I don't agree on some parts what the house is saying because I believe that people nowadays fear drastic changes and opt for a quick and a feasible decision like this one; I believe that if we control the growth of cities we can keep some things under control and enphasize what is missing to improve people's lives. Nevertheless, if this works, how can we manage the newborns? How can we say to people that are able to enjoy good quality of life, good jobs and health care for example,  that they can't have kids? How can we say no to those people who lives in a city with a slightly worst quality of life and would like to move to another city better than they are now? I think this goes against the right of freedom and may cause another problem in the future. So when this problem happens we will look foward to find another solution and so on.

So, the disagree part comes so deep in my mind because I believe that we are able to make drastic changes, breakthroughs or revolutions when we want to; we just need to leave aside our fears, perceive what need to change,  be creative and open-mind all the time. For cities to grow without losing quality of life I believe the government, whether local, state or federal need to put aside the partisan issues to govern on behalf of people today and tomorrow; they need to build things not to boast themselves, but rather to serve the interests and welfare of people. When the parties work together I can assure that there will be a more efficient work, in which the population will be benefited.

Simon Sinek: How great leaders inspire action

Simon Sinek has a simple but powerful model for inspirational leadership all starting with a golden circle and the question "Why?" His examples include Apple, Martin Luther King, and the Wright brothers -- and as a counterpoint Tivo, which (until a recent court victory that tripled its stock price) appeared to be struggling.

Brazilian Economic Outlook in 2011

Always at the beginning of the year the market is reached by a storm of predictions about how the year should be. To confirm this phrase I will begin this post with an interview that I watched yesterday with Eike Batista @ RedeTV where he talks about the Brazilian economy.

The interviewer start asking about what are the scenario for the brazilian economy for 2011 and what would be the good and bad news. "The positive part I think that the Brazilian economy will keep growing above the american and european standards, this is very important. However, there are several points that we need to control. I dare to say that the GDP would grow between 4 to 5% in 2011 (...). Obviously this several points such as infrastructure and skilled worker are pressing the inflation up." says Eike Batista. As businessman, the market also predict that Brazilian GDP will grow less compared to 2010 from 7,5% to 4,5% in 2011 due to a  number of factors including the increase of the SELIC benchmark interest rate to hold the inflation in its target defined by the Brazilian Central Bank. Speaking of Central Bank, Alexandre Tombini,on his first speech as the new president of the institution said that the current inflation target of 4,5% for 2011 and 2012 should be reduced.

Back to the interview, the interviewer asked Eike about the valued local currency against a basket of currencies especially the dollar and Eike answered: "There are a few industries in our economy that need sort of a help such as lower tax; on the other hand the valued currency can help companies to become more efficient because they can buy for a cheaper price machines and tools that are just fabricated abroad (....)".

If you would like to watch the full interview, please click here.

It is impossible to talk about scenario without citing the Public sector net debt. Tulio Maciel, Deputy Head of Economic Department of the Central Bank announced the increase in the forecast for the level of net public sector debt relative toGross Domestic Product (GDP) in 2010 but he also point to the fact that the trajectory of the indicator has been falling over recent years. For 2011, thecourse must be repeated, since theofficial forecast for Central Bank is that the debt will drop to37.8% of GDP at the end of next year.

I will keep updating the brazilian economic outlook for you readers.

The World's Greatest Money Maker: Warren Buffett - BBC Documentary

PART 1

PART 2

PART 3

PART 4

PART 5

PART 6

What IHS predicts for global economy in 2011

I said I wouldn't post this year anymore but I received an interesting report today so I decided to share with you. This report is from International Business Times.

What IHS predicts for global economy in 2011

By IB Times

Contrary to the prevailing view, the U.S. economy will gain growth momentum in the year ahead, while GDP will grow stronger in Europe and Japan, research firm IHS Global Insight has said in its forecast for 2011. The report, written by IHS Chief Economist Nariman Behravesh and IHS Global Insight Economist Sara Johnson, also says that though emerging markets growth will slow down, their growth will still be three times faster than that of the developed world.

The following are the main forecasts by IHS:

More stimulus will push unemployment below 9 pct in US

The U.S. recovery will pick up steam as the year progresses. In 2011, the U.S. economy is likely to be firing on more cylinders. Housing investment will begin to recover and the United States will enjoy export-led growth. Additional fiscal stimulus will add 0.6 percent to growth in 2011 and push the unemployment rate below 9 percent by year's end.

Europe, Japan growth to be stronger

Europe and Japan will also see slightly stronger GDP growth in the second half of 2011. The pace of growth in Europe is slowing, mostly because of fiscal tightening and jitters about sovereign debt. Stronger exports and improved consumer spending (especially in Germany) will help by mid-year.

China, Brazil growth will diminish markedly

Emerging markets will slow, but continue to grow three times faster than the developed world. Among the big emerging markets, China and Brazil will see the most pronounced slowing trends (as fiscal and monetary tightening is used to cool these economies), while growth in India and Russia will not suffer much (if at all).

Rates will stay unchanged in G-7, rise in BRICs

Interest rates will remain on hold in the G-7, but keep rising in the BRICs. The Federal Reserve, European Central Bank, Bank of England, and Bank of Japan are all going to keep policy rates on hold through most of 2011. In contrast, central banks in many of the large emerging markets and a few developed countries (e.g., Australia and Norway) will likely continue raising interest rates in 2011.

European economies will go for more fiscal tightening

Fiscal policy will become tighter in many large economies. Most countries in Europe will be tightening fiscal policy—some of their own accord and some under duress (e.g., Greece, Ireland, Portugal, and Spain).

Commodities' rollercoaster ride to go on

Commodity prices will move up gradually. The rollercoaster ride of commodity prices could continue. By the end of 2011, most commodity prices will be 5–10% higher than today. Factors other than demand growth (e.g., inventories, excess capacity, exchange rates, and speculative activity) will influence the extent of increases.

Inflation to remain inconsequential in developed economies

Inflation will not be a problem in the developed economies, but will rise in many emerging markets. Consumer price inflation in the advanced economies will average around 1.4% in 2011, compared with 5.5% in the developing world. Strong growth and fixed or managed exchange rates will contribute to upward price pressures.

Trade imbalances to stay the course

Global imbalances will neither worsen nor improve by much. The U.S. current-account deficit is likely to stabilize around $500 billion. A weaker dollar and strong emerging markets’ growth will help exports, but rising oil prices will raise import costs. Current-account surpluses of China and the Eurozone will hold steady for awhile.

Dollar will rise

The dollar will slide against most currencies, with the possible exception of the euro. A two-speed world and still-large global imbalances will have a predictable impact on exchange rates—downward pressure for the ―"crawling" economy currencies and upward pressures for the ―"galloping"economy currencies.

Last post of the year

Today I was thinking about something to write in here but I didn't have anything in mind so I decided to write the last post of the year so I will be able to take a time for me and allowing me to be able to start a new year with fresh, smart and more advanced ideas.

If I'd be able to define this year with one word it would be initiative due to the voluntary work as a teacher, the initiative to live just by myself, the initiative to create this blog and the initiative to study to take the certificate CPA-20, those would be some of the things that I did to try to turn myself a better person. Although I didn't get an internship as I'd like to, I'm with the kinda feeling that I gave the best of myself during the tasks I had to do and that's why I believe that future still hold a nice story to me.

I want to thank for all the visitors on this blog. I got excited when I receive about 300 page views on just one week when I started to write in here.

I would like to wish for all of you (known and unknown) a very nice Christmas and a faboulous 2011 full of success. 

This is the wishes from a dreamer but a daring person!

See you in 2011.

Treasury bond prices sank for the second day on Wednesday

Teasury bond prices sank for the second day on Wednesday due to the deal to extend tax cuts enacted during George W. Bush presidency, according to Reuters. I wrote on August 23 on 'Increase on capital taxation for 2011' that in 2011 those benefits of tax cuts would expire because the american debt should climb to 13,7 billion dollar or 65% of GDP in the end of 2010. So, raising tax would control that deficit. But the current economic scenario says that is better to keep the tax cuts to generate a stimulus to the economic growth but can increase a fear of inflation, affecting directly on teasury bonds because the market believes that it can mean an increase in interest rates. So today the dollar rose againt a basket major currencies due to that perceptions about the american economy and pushing up the gold price. You can see on the chart below that investors are running to conservative assets such as gold and the price of 10 year bond interest rate is moderately getting higer because investors require more return in that kind of asset.

Debt crisis around European Countries

Today I was reading a market signals sovereign risk report released by Moody's. The report related that Portugal and Spain default probabilities had climb to a record as Ireland's bailout failed to mollify the capital market. So, I thought that would be interesting to cut and copy a graph from that report:

According to Moody's, CDS-Implied EDF measures use CDS spreads to accurately determine an entity's default risk. You can find out more at the website.

What we do in life (present) echoes in eternity (future)

This is the first time I post something related to my personal interests. I'm starting this post with this music because now I can enjoy myself a little bit (I'm on vacation). Here is a big, magnificent, splendid work from Antonín Leopold Dvořák that I appreciate a lot. It's a combination of energy and calmness at the same time as we hear the movements and by the way,  I listen to this concert almost everyday!

However, this is just a plus. The main subject of this post is related to a  meeting I had with the course director to talk about the classes and the progress of the course because I'm the class representative of my class.

At that time, students were complaining about early readings for class that the teacher was demanding. They believed that it was not necessary and that the teacher should not force that kind of reading. So he started to ask questions during the class about the previous readings and nobody was able to answer it and consequently asking them to leave the class.

As a class representative, I told the problem to the director and he very was skeptical about it, I could see his face expressing anger and intolerance. He told me that the readings were part of the learning agreement we signed when we enter college and he drew on the blackboard a graph explaining how important is to keep reading and what were the probabilites to success following that step. That graph was derived from a study which I forgot the authors but that graph I would never forget so I would like to share this with you:

He told me that people will just be able to be on the top of a big organization if they study a lot to develop their conceptual skills. Those positions require a lot of reading to be able to have an eficient discussion, follow tendencies and think strategically. He also said that at that time we will responsible to give the gidelines to the company's future, that's why the directors need a lot ot conceptual skills.

At the end of the meeting he gave me an advice: "Marcel, try to pass that message to your class and don't worry about the results. We can distingish early on who will or won't succeed."

"Money lost, nothing lost; Health lost, much lost; Character lost, everything lost."

Lately I’ve been writing about economics and finance that are subjects I really like but don’t reflect my interests. Today when I was watching the Bloomberg TV where 3 Hedge Funds were being raided by FBI due to insider trading, the reporter asked to the interviewee: “What are the consequences for the ordinary traders?” Then the interviewee said: “You know, this shakes the market structures. You buy a stock because you trust in that company. When a case of insider trading happens, how can people trust in each other?” and that’s when I thought: “I must need to write about it, character has always been a good interest for me.

Everyone knows that monetary relationships are based on trust, it means we are in a fiduciary system so a prerequisite to get a job would be to demonstrate confidence, character and responsibility above all the technical skills. However nowadays people are hired and paid due to their achievements, technical skills and academic education, this is so wrong I think. I’ve been on some group internship interview and I haven’t heard of anyone saying about character or something like that, they disguise personality through their perfectionist speeches to be hired. Well, there is a need to have a little bit of malice but we can’t let this be the main selection item.

To own a character is something very complicated nowadays when there are a lot of easy ways to achieve a goal in a short space of time, this can be magnificent, but there is no lie sustained for a long period of time. I believe time make us see the difference between bad and good. Time is, no doubt, the god of truth; it is the main responsible for the downgrade of empires owned by bad faith; and guarantee the wealth and stability for those whom were responsible and did their homework. Once I read a certain Chinese proverb that said a lot of thing about breach of trust: "Money lost, nothing lost; Health lost, much lost; Character lost, everything lost.

So I think people should valorize a little bit more the people character, find out if they are truthful and responsible. When I own my Investment Bank I’ll assure to interview any candidate that tries to get a job and work for me and with me. We cannot depreciate the personal relationships based on honesty because it is this relationship that paves the way to a better future." 

Brazil’s Tax on Capital Inflows, 2009–10

Today I was reading the Global Financial Stability Report released by IMF and I saw a very nice text about the brazil's tax on capital inflows. It is so interesting to read about it because I believe many countries such as Indonesia or Thailand will adopt this measure to slow down the capital inflow on their countries to avoid bubbles on assets.

"Brazil’s reimposition of an upfront tax on capital inflows in October 2009 triggered a wave of interest in many countries in the potential use of such measures to limit exchange rate appreciation. There is evidence that the Brazilian measures worked to change the composition of capital inflows and that they had a small but discernible impact on interest rate arbitrage.

However, they do not appear to have reduced aggregate capital flows into Brazil. In response to heavy portfolio inflows and substantial exchange rate appreciation during the preceding seven months, Brazil imposed a 2 percent entry tax (the IOF) on inflows to domestic bond and equity markets on October 19, 2009.1 Other types of capital flows, including direct investment, and dollar borrowing by Brazilian banks and firms, were not directly affected. The Finance Ministry announced that the measure was intended to combat speculation in capital markets, and to counteract the appreciation of the real, which it viewed as damaging export industries and employment. This was not the first time Brazil had employed controls on portfolio inflows—up until October 2008 it had levied a 1½ percent tax on bond (but not equity) inflows, but the authorities had eliminated the tax in response to the financial crisis.

Nominal appreciation against the dollar came to an end after the IOF was imposed, but reserves continued to rise steadily and the real continued to appreciate against the euro. Daily exchange-rate volatility was essentially unchanged after the tax. Foreign reserves continued to accumulate but at a reduced pace of about $100 million a day, compared with a little more than $200 million a day in the seven months before the tax was imposed. Chow breakpoint tests fail to show a decisive structural break associated with the tax for either reserves accumulation or for the dollar exchange rate. Foreign investors appear to have exploited some opportunities to divert flows away from investments on which the IOF would have a significant impact to those where it would not. Equity flows, which had reached a record pace in March-October 2009, and for which the effects of the IOF would have been significant, did diminish after October. However, and somewhat surprisingly, the rate of inflows into domestic bonds, where the impact of the IOF should also have been large, remained quite robust after the IOF was imposed. There were increases in short- and long-term dollar borrowing, neither of which is subject to the IOF in its present form. Foreign net long real positions in the domestic derivatives market, for which the effective incidence of the tax would be much lower than in the bond market, have also increased on average since the IOF. Futures-implied offshore interest rates can be constructed and compared with actual interest rates to test the effectiveness of arbitrage under the capital inflow tax. The nondeliverable-forwards (NDF) implied interest rate in Brazilian reais, based on the offshore nondeliverable currency forward, f90,off , can be calculated as:

iBRL,off = (1 + is) (f90,off |e)4 – 1.

This measure can then be compared to the onshore Brazilian three-month interest rate to determine a “basis spread,” as BSoff = (iBRL,off – iBRL). Full covered interest parity would entail that this be zero. For most emerging markets, however, basis spreads are not zero, even under normal market conditions. If the IOF is effective in breaking the link between domestic and foreign fixed-income markets, or in inserting a wedge between the two, this should be evident in market prices. If the new regulations eliminate arbitrage, or impose a cost of arbitrage between domestic and offshore markets, then there should be a difference between the implied interest rate in Brazilian reais available offshore through the NDF market, and the interest rate in reais available onshore in Brazil. The implied interest rate in reais should be lower offshore, where the IOF cannot be collected.

The basis spread derived from NDF trading should become negative, entailing a lower-than-market interest rate in Brazilian reais. If the 2 percent IOF is fully binding and if there had been full arbitrage before it was imposed, then the basis spread should widen by 2 percent on instruments with a one-year maturity. In the event, offshore basis spreads showed small but discernible signs of shifting in the period after imposition of the IOF. Offshore NDFs strength- ened relative to onshore currency forwards, and the NDF-implied basis spread did widen, although by only a fraction of the 2 percent (or 8 percent for 90-day instruments) that would occur if the IOF were fully binding. Both of these relative movements of offshore spreads were in a direction and of a magnitude consistent with a small but discernible effec t of the tax on cross-border arbitrage. There was little movement in onshore spreads. Overall, movementsin Brazilian basis spreads did not diverge appreciably from those of comparable emerging economies that took no special actions during this period, suggesting that the net impact of the IOF on interest rate arbitrage was not large." - IMF World Economic Outlook, October 2010.