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Signs Of Rolling U.S. Credit Crunch Will Miss Latin America: A Long-Term Perspective

By Rudy Martin | Sept. 19, 2008

Last week, I had all the answers for how to make money in Brazil and the rest of Latin America. I had just updated my ratings on 50+ Latin Capital Market ADRs and sent out a new set of recommendations to my subscribers. I had just finished measuring my results on the hits where I got the right answers to a stock's direction and the result was an outrageous 20% average return. Even if you netted out the misses, I was solidly ahead on recommendations versus declines in the U.S. and emerging markets. I was elated and happy that my friends who invested were in the black, too.

Then the U.S. stock market started its unraveling. I won't reiterate what you've already heard over the news radio, in the papers and on the Internet. Nor will I repeat what you've probably already heard from your favorite market mavens.

But I agree -- it's definitely bad news for the U.S. and other developed economies.

So, the question is: What to do now and is it too late to safeguard your life's savings?

Clearly, there has never been a better time to SELL the heck out of U.S. stocks and stash money in cash, gold or select situations in overseas markets.

Let me be clear: The signs of the rolling credit crunch are missing in Latin America.

According to Martin Weiss, in his latest Safe Money Report,the outline of a credit contraction cycle (otherwise known as a debt market collapse) looks like this ...

It starts with consumers defaulting on their auto, home and student debts at an increasing rate. The central government attempts to bail out both borrowers and lenders, but is swamped with requests for more capital.

Major financial institutional losses continue to pile up, forcing mergers and liquidations. Sovereign and international private equity funds purchase weakened companies cheaply, but soon tire of losses and retrench to domestic investing.

The remaining home-country financial system reduces its debt-leveraging capacity. Corporations affected by weakened economy and illiquidity are unable to roll over old debts. Short-term commercial paper markets dry up further, prompting cash shortages in the general corporate sector.

Investors' poor appetite for high-yield corporate debt, asset-backed securities and residential mortgages creates a selling panic, which leads to further credit reductions ... and the credit contraction cycle begins again with the consumer.

The events of the last 72 hours make it apparent that no global financial institution is immune from the effects of the credit market collapse. Emerging market economies will experience a drop in their hot growth rates, but still maintain their relative performance advantages.

What accounts for such a rosy picture for Latin American stocks?

The growth in Latin America is driven by mega-forces that cannot be reversed by the financial markets in New York, London or Tokyo. What we are seeing in Latin America is a unique transformation on several fronts.

Here is the Latin Capitalist view of economic growth -- an interdisciplinary perspective.

* Political Stability. There is a new political structure in place now that unites 385 million people under one flag -- and it's already demonstrating its clout. Less than four months after its signing, the UNASUR leaders, united behind Evo Morales' democratic government in Bolivia, created a commission to investigate 30 deaths and offered to mediate with rebels, averting military action threatened by Venezuela. The new structure calls for a central bank, military defense, better telecommunications/media and energy co-operation.

* Demographic Growth. This growing population will require more power, water, roads, ports and airports. Across the continent, an infrastructure boom is underway as governments and private sector players are deploying unprecedented amounts of capital. This requires more steel, cement, power and transportation-related services.

* Economic Strength. The twelve UNASUR countries reported $2.5 trillion in GDP in 2006, with Brazil accounting for over $1 trillion of this amount. The boom is putting money into the pockets of the emerging middle class, who are adopting the eating habits of Americans and Europeans, in turn causing grain and meat prices to hit new highs. Fortunately, Latin America is the world's foremost food producer and exporter.

* Technology Transfers. Better technology and increased urbanization boosts productivity and quality of life. You can blame it on the Internet or you can blame it on increased urbanization. You can even blame it on rock 'n roll. But whatever you blame it on, the new Latin America is more integrated than ever and now seeks ways to cooperate and solve issues regionally. One example is the $4 billion heavy-oil refinery project between Brazil and Venezuela, which will reduce the need to import refined petroleum products.

* Local Financial Markets' Expansion. Brazilian banks are among the best capitalized with no exposures to U.S. mortgages or derivatives. Unlike their U.S. and European counterparts, Latin banks are in an expansion mode, fueled by low-costs deposits and solid increases in lending for automobiles, mortgages and commercial loans.

And unlike their northern neighbors, Latin American consumers and companies are not suffering a credit crunch. Eventually this should also be reflected in higher stock market valuations of the companies leading the Latin American transformation.

As I write this to you, the Mexican market is up 4% and Brazil is up 8%.

Did something fundamental change?

No, nothing in the long-term view has changed. But one thing is true: In the case of Latin stock investing, it pays to be a patient investor and buy on dips.

Best wishes and happy trading,

Rudy Martin>