2 cents bfr the opng - BZ market goes Vol-taire

Curiously enough, this is the second influential Enlightenment thinker I’m referencing in a very short period (see Newton’s First Law).

That, in itself, is not a good sign.

I’ll come back to this point later.

“History never repeats itself, but man always does”

Voltaire

As highlighted here last Friday (please read The path of least resistance):

“if the fiscal doesn’t play its hand, the ultimate outcome will be the BCB having to manufacture a hard landing in the economy that should manifest in the eve of the election cycle, which in turn, should trigger even more animosity towards the fiscal accounts.

Not good.

The markets should continue to deteriorate until the current administration prove that the scenario above is not the base case.”

Let’s agree that yesterday, was quite a “deterioration”

And, different from what the BCB chairman (vainly) tried to advocate not long ago, it is not an exaggeration.

We’ve seen this before.

This time though, the US rates are not 2% and the USD outlook is not friendly (at all).

The economy will slow down next year.

When and by how much this deceleration occurs remains uncertain, but Voltaire’s insight gives us a strong clue about the likely response.

Because human behavior, particularly in politics, is remarkably consistent.

As Morgan Housel succinctly put it: “The more debt you have the narrower the range of bad outcomes you can survive”

Based on the latest IMF projections, Brazil’s gross debt to GDP is projected to close this year 19 percentage points above the average of other emerging markets.

And this gap is increasing on a concerning pace, despite our strong(er) growth.

By 2026, the gap between Brazil’s debt and other emerging markets is expected to increase to 22.4 points.

The gap between rhetoric and action is widening—much like the country’s debt burden, leaving Brazil with a razor-thin margin to manage bad outcomes

What alarms me most in recent weeks is the apparent death of the “BRL paradox.”

July last year, I described this invisible mechanism of checks and balances: when the USDBRL exchange rate rises sharply, it typically raises the odds of a positive policy reaction. Combined with a currency base effect, this creates a self-correcting loop, pushing the USDBRL back down.

The currency just breached the 6.00 mark, and there’s no sign of any meaningful policy response.

To the contrary.

The (brilliant) political analyst, Thomas Traumann, wrote about this in his yesterday’s article to Veja:

“Brasília has gotten used in recent days to a dollar level above 6 reais as part of the Christmas décor […] The bolsonaristas, meanwhile, spend their days talking only to their own circles and voting in favor of more guns on the streets and fewer legal abortions in hospitals.

The Centr?o is busy blackmailing the government for more unchecked budget amendments. […] Most ministers are more concerned with keeping their jobs in a future cabinet reshuffle. The Central Bank is the only remaining island of sanity in Brasília.”

Nonetheless, in his first televised interview after emergency brain surgery, President Lula chose to publicly criticize the only institution still holding firm: the Central Bank.

“The only thing wrong with this country is the current interest rate, which is above 12%. There’s no explanation, inflation is totally under control. The irresponsibility lies with those who raise the interest rates, not the federal government.”

This statement epitomizes the economic mindset of Lula III—a policy approach tinged with shades of Absolutism.

His argument rests on a historical narrative: Lula presided over Brazil’s most successful period in modern history. Therefore, we simply need to trust him. He knows what he’s doing. Critics—particularly those from “Faria Lima”—are treated as conspiracy enemies.

In short: "I am the state."

Voltaire’s writings were a sharp critique of Absolutism, and they became a driving force behind the French Revolution.

Mind the vol(taire) of the markets.

Tots?