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An Awful Lot of Problems in Brazil

Brazil is once again a junk country. No disrespect to the 200 million Brazilians, it’s just the opinion of Standard & Poor’s, which downgraded the country’s sovereign debt to BB+ yesterday, making the debt below investment grade for the first time since 2008.

Poor Brazil. It’s gone from economic rising star to basket case so many times in the past it’s hard to keep track of whether things are getting worse or getting better. For the near term, it looks like things will get worse; S&P continues its negative outlook on the country, which means there’s a good chance we’ll see more downgrades.

A Cautionary Tale

For U.S. investors, Brazil’s troubles are a cautionary tale. In our quest for growth and appreciation, we are often tempted to venture beyond our borders. That’s not necessarily a bad thing since investors around the world have a home-country bias that tends to make their portfolios less diversified than they should be.

But U.S. investors are often tempted to go overseas and do other things that often are too risky whenever conditions here are not booming. The long-time decline in interest rates here and the dearth of return in traditionally safe fixed-income investments have led many investors to take more and more risk in the hopes of getting some kind of what they believe is a fair return.

Living in a Low-Return World

Unfortunately, we live in a low-return world, and today’s “fair” return is pretty paltry. It’s hard for investors to adjust to that fact. And it’s often depressing for retirement-oriented investors to realize that given the likelihood of low returns for quite some time, it will take a lot more savings to generate the kind of income they expect or require in retirement.

Since I imagine that few American investors directly have much tied up in Brazilian sovereign debt, its falling price will probably have little impact here on individuals, although some pension funds do invest in foreign sovereign debt. But the move shows just how tough the adjustment to a deflationary world environment will be.

Brazil, as we know, has been a major supplier of raw materials to China. Other South American countries and Australia are in the same boat. The Chinese economy is either growing much more slowly (the happy talk version) or is actually slowing down slowly (the consensus view) or quicker than many believe. And a slower China is a depressing prospect.

The U.S. economy, while continuing to expand, is barely able to provide enough oomph to spur economic growth in the rest of the world. Still, its relative strength keeps making the dollar stronger. And that, in turn, makes things tougher for emerging-market countries that pay bills in dollars or have borrowed in dollars.

The Bottom Line

Sure, you can criticize some emerging-market countries for faults in governance and regulation. But even Brazil’s left-leaning President Dilma Rousseff has tried to keep Brazil in the investment-grade camp by raising taxes and cutting spending despite a weak domestic economy.

Unfortunately, times are tough all around the world, and all of us, whether as investors, workers or retirees, have to accept that returns won’t be as easy to come by as they have in the past.