Ramblings of a Portfolio Manager 10-2-2009

Ramblings of a Portfolio Manager or Blame it on Rio.

The American Heartland was dealt a psychological blow last week when the IOC eliminated Chicago in the first round for consideration for the 2016 Summer Olympics. The winner, Rio de Janeiro, will become the first country in South America to host an Olympiad.

While the IOC ostensibly chose a Latin American country due to the dearth of Olympic games held in that part of the Southern Hemisphere, it strikes us as a little more than coincidental that each Summer Olympic venue chosen over the last several decades has tended to be where the economic action was occurring (2004 excepted, with Athens being a nostalgic choice). Sydney in 2000 in many ways signaled the passing of the economic growth torch from the US to Asia. Likewise, Beijing 2008 symbolized the rise of China in international economic status. So now we have Rio. Is Brazil where the economic now action lies? Well, the Bovespa is up 63% year-to-date versus, a paltry 8.1% for the Dow Jones (last year they were down similarly at 39% and 32% respectively). There is a not-so-subtle irony in Chicago’s loss to Rio. Barely three decades ago, Latin America was known as the deadbeat of the world. Over leveraged and unable to repay the mountains of debt piled up during their industrial and infrastructure growth phases, Brazil, Argentina, Mexico, Chile and other commodity-dependent South American countries threatened to topple the world’s (particularly US) banks. Lending was cut off and their economies sunk into recession. Any of this sound familiar?

Fast-forward 25 years and Latin America looks to be the hot place to invest (and play Olympic beach volleyball). How did this happen? A combination of sovereign debt forgiveness, currency devaluation and strong (commodity-based) economic growth, which helped the region catch up to their debt payment burden. A resumption of lending by international banks contributed to that strong economic growth. So now that the US is piling on huge amounts of debt is there a potential historical parallel? Perhaps. But it is important to remember that in the early 80’s the Latin American “deadbeats” were (and still are) emerging economies with much of their economic potential still ahead of them, leaving them headroom to outgrow their troubles. The US in 2009, by contrast, is a very mature economy with a population growth near zero. While productivity gains and technological innovation may yet contribute to positive GDP gains here, it’s going to take some significant growth to catch up to the obligations we are now incurring. As Speedy Gonzales would say, Arriba! Andale!