Of Brickbats and BRICS

Some commentators are critical of President Obama’s Latin American trip. They think that with Japan facing a nuclear crisis and overwhelming reconstruction expenses, the timing of his trip is poor. On the contrary, I think it couldn’t be better.

One of the more amusing questions raised by the earthquake and tsunami disaster in Japan has been that of financing: “Where will the Japanese get the money to finance perhaps $200 billion in reconstruction expenses?” Are they kidding? With a trade surplus of $85 billion last year and a $5 trillion economy, I think they can find the funds.

But one question is relevant. For four decades Japan has been a major purchaser of US Treasury securities. If they are now going to spend this money to rebuild Sendai and other hard-hit areas, who will replace Japan as the marginal buyer of US debt securities?

Enter Latin America—specifically, Brazil–also Russia, India, and China. The BRIC countries have tremendous trade surpluses, stable budgets, growing economies, and a need to “sterilize” their currencies—to invest their surplus abroad, lest repatriation cause the currency to rise and ruin their export machines. They’ve got the cash. With Japan out of the picture, we’ll soon be needing that cash.

President Obama is in essence paying a sales call on Brazil. Expect him to visit the other investors soon.

Douglas R. Tengdin, CFA
Chief Investment Officer
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