(B)(N) Extreme Economics – Our New Shoes From Brazil

The Fundamentals

Drama. We buy about 150,000 pairs of handmade shoes and fashion boots from Brazil every year and they cost us $200 million reais (BRL Brazilian Reals) this year which we have to pay in Brazil by buying reais at the bank in Sao Paulo with our US dollars and the cost would have been USD $76 million this year and up from $61 million last year because of the inflation in Brazil and despite their weak currency.

The problem is that the consumer and producer price inflation in Brazil has been running between 6% and 9% per year since 2012 (and it was much worse and unpredictable before then) and it’s been about 15% per year in the “unofficial market” that we need to use to pay our producers and the same shoes that cost us $200 million reais this year, and USD $76 million, were only $100 million reais and USD $54 million in 2012 at the official bank rate for currency exchange at that time, and our cost has been going up every year since and has only been offset slightly by the weakness of the Brazilian reais against the US dollar.

But even that equation has changed this year whereas the inflation in Brazil has not; please see Exhibit 1 below.

Exhibit 1: Our New Shoes From Brazil

But in all of that time, we never raised the price of our shoes from the average $480 a pair that our customers rely on and for which many of them need to save-up all year just to buy their new shoes and our business hasn’t changed although there are a lot of companies and retail stores that want to buy their shoes from us at that price.

And we had a blow-out sale in July for the Rio Olympics, 20% off, and a whole lot of souvenirs that they could buy with their savings.

All that and the IBRX 50

To do all of that, we hedged our costs by investing in the Brazilian stock market, the IBRX in Sao Paulo, in 2012 and we’ve made more money in the stock market that was as good as cash and with no risk at all, than we did on our shoes and we’ve passed those savings on to our customers and our employees.

And as a consequence, we can now pay all of our bills in Brazil with reais made in Brazil and Brazil has paid us for its own inflation and currency uncertainty and we never had to explain to our customers what inflation was because there isn’t any in the US.

In other words, we’re not allowing Brazil to export its inflation to us but rather, we’re exporting our deflation to them and keeping only the inflation (and jobs) that we want.

The Perpetual Bond

The “Perpetual Bond” is a full market (B)-class portfolio of stocks in which we are willing to hold a piece of everything and anything subject only to the usual rules of (B)-class and (N)-class holdings.

In this case, the market is the IBRX 50 which trades in Sao Paulo in reais and our initial and only investment was for $100 million reais which we bought for US $54 million to match the price of our shoes in 2012 and the next year’s budget, although that’s not strictly necessary and any multiple will give the same results subject only to our budget.

The market, however, is a model of the Brazilian economy and it is extremely volatile and tied to commodities prices, and a buy and hold or “value” or index investor got net nothing between 2012 and 2015 and the market is up 50% since December but it’s done that both up and down lots of times in the past.

In other words, it’s not enough to just buy the stocks and take the same ride as everybody else; they need to be managed and for us, that means the (B)-class portfolio and 100% capital safety guaranteed and a hopeful but not necessarily guaranteed return above the rate of inflation, for which the latter, inflation, is obviously a tall order in Brazil.

These Boots Are Made For Walking

We ran the (B)-class portfolio in the IBRX 50 pro forma, in the usual way, but taking only enough money out of it every year to pay any changes in our reais bills and doing that has saved us USD $112 million in the last five years which is more than twice what the portfolio cost, $54 million in 2012.

But that’s not all. This portfolio just keeps on giving and this year there’s enough money in the portfolio to pay our entire  bill if we want to and there’s more than $100 million reais in the cash account that we could take and it won’t change anything in the portfolio.

The Boot Class Portfolio

In other words, the shoes are trending to “free” for us and buying them in Brazil and selling them in the US is just a hobby that we have.

Please see the Cash Flow Summary in Exhibit 2 below for more details (and click your heels and again to make it larger as required).

Exhibit 2: The Boot Class Portfolio – Cash Flow Summary

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy and The Coal War; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that.

And for more information and examples of the Free Market Yieldand the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.