Global companies are having trouble paying their bills…
Last week, credit rating agency Standard & Poor’s (S&P) downgraded Brazil’s government debt from “investment grade” to “junk” status. “Junk” status means Brazil’s bonds are at a high risk of default.
This is no surprise…
In 2011, socialist Dilma Rousseff took over as president of Brazil. She has wrecked the country’s finances in just four years.
Brazil’s government had a significant surplus when Rousseff took over in 2011. But last year the Brazilian government racked up its largest deficit in history. It spent $129 billion more than it took in.
As you can see, Brazil’s government surplus has shrunk every year since Rousseff took power. It finally turned to an outright deficit last year.
Brazil recently entered its worst recession since the Great Depression. And Brazilian stocks are in a severe bear market. EWZ, a major Brazil ETF, is down an incredible 52% in just the last year.
• Yesterday we explained how abnormally low interest rates have fueled a huge borrowing binge in America…
We explained how the Fed’s easy money policies have encouraged Americans to borrow record amounts of money. Americans have borrowed to buy things like stocks, houses, and cars.
But it’s not just America…
Low interest rates in the U.S. have also encouraged companies in emerging markets to borrow record amounts of U.S. dollars. The Wall Street Journal reports:
“…the amount of dollar-denominated loans to borrowers in emerging markets, excluding banks, has nearly doubled since 2009 to more than $3 trillion.”
Brazilian companies alone have amassed $270 billion in foreign debt since the last financial crisis. Bloomberg reports that banks and non-financial companies in Brazil have doubled their dollar-denominated debts since just 2007.
• The dollar has soared in the past twelve months…
Regular Casey readers know the U.S. dollar has soared 20% vs. other major currencies in the past 12 months.
This is a HUGE problem for foreign companies that have borrowed U.S. dollars.
Take Brazil, for example. The Brazilian real is down an incredible 40% vs. the dollar since the beginning of 2015.
This means that a Brazilian company that borrowed in dollars suddenly owes 40% more.
Here’s a simple example of how the math works:
Say a Brazilian company pays $100 per month in interest on US dollar-denominated debt.
It must pay this interest in U.S. dollars. But like many Brazilian companies, it earns most of its revenue in its domestic currency, the Brazilian real.
At the beginning of 2015, this company had to earn 260 Brazilian reals to pay $100 in interest.
But because the real has lost roughly 40% of its value vs. the dollar…it now must earn 380 reals to pay the same $100 in interest.
This company’s monthly interest bill went up 40%.
• This is happening on a large scale around the world…
It’s a big reason why corporate default rates are rising.
Bloomberg Business reports that “the global tally [of corporate defaults] has reached at least 65 this year, surpassing 60 for the whole of 2014.”
Emerging-market downgrades are 4 times the amount of upgrades at S&P — the worst ratio since 2009 – as a record $5.2 trillion of bonds comes due for the debtors this year, according to Bloomberg-compiled data.
The Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), the largest ETF that tracks local currency emerging market bonds, is down 17% this year.
• This is another unintended consequence of the global monetary experiment…
By pushing rates to near zero and holding them there for seven years, the Fed hasn’t just warped the American economy. It has warped the entire global economy.
Many foreign companies that borrowed in U.S. dollars thought they were getting a “free lunch.” They thought borrowing in U.S. dollars would save them money since U.S. interest rates are so low.
Borrowing dollars looked like a cheap source of financing. But it has backfired badly.
The Fed’s zero-interest policy causes people to make bad financial decisions. This is just one example of the trillions of dollars of bad decisions people have made in the last seven years due to near zero interest rates. Another word for these bad decisions is “malinvestments.”
The trillions of dollars of malinvestments created in the last seven years need to be liquidated. And the corporate defaults we’re seeing are likely just the beginning.
The coming liquidation phase will cause massive shifts in wealth. Very soon, protecting your savings will likely become more important than ever.
That’s why we wrote a new book with all of the best strategies we’ve learned over the past twenty years for keeping your savings safe. You can learn more about this book – which we’ll mail to you for just a nominal $4.95 processing fee – by clicking here.
Chart of the Day
Today’s chart shows the U.S. dollar index going back to the 1970s. This index tracks the dollar’s performance versus other major currencies.
As you can see, the dollar generally goes down. Casey readers know the U.S. dollar has lost 96% of its value since 1913.
But as you can also see, the dollar recently made a big move up. It broke above its 30-year downtrend, and is now at its strongest level since 2003.
The dollar’s strength won’t last forever. The Fed’s easy money policies will eventually take the dollar to new lows.
However, breaking above a 30-year trend line can be significant. We wouldn’t be surprised if the dollar stays strong for at least another few months.
Delray Beach, Florida
September 15, 2015
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