Why Latin America Has the World’s Sanest Central Bankers

As I scour the globe for trading and investing opportunities, I often compare a country’s economic and financial attributes to those same characteristics in the United States.

The results, as you can imagine, can be surprising. That’s because some small differences can result in major changes from which their consumers, companies and investors around the world can directly benefit.

For example, economists usually think free-trade agreements are win-win situations. Last month I looked at regional trade agreement trends. The surprising result: certain Latin American countries are miles ahead of the U.S.

Right now U.S. markets are nervously anticipating that the Federal Reserve will start "tapering" its massive Quantitative Easing programs, perhaps sooner rather than later. I understand why investors are nervous. I feel a little of it myself.

Until very recently, the U.S. stock market was in a disorienting "bad-news-is-really-good-news" period. Negative economic reports tended to lift stock prices. Analysts interpreted economic weakness as a sign the Fed could postpone the taper decision.

These periods always end.

The buoyant stock market topped out and returned to a "good-news-is-bad-news" mode. We’ve seen Wall Street interpret favorable employment and construction reports as "good news." The spin: The economy is strong enough to make the Fed comfortable enough to start tapering off its massive purchases of Treasury and mortgage securities.

Watching all this made me wonder how central banks in other parts of the world compare with the U.S. Federal Reserve. Do local investors elsewhere trust their monetary authorities more than Wall Street trusts the Fed?

I found something startling. Some central banks, particular those with a Latin beat, have much more appeal with the investors who know them best.

Latin America’s top central banks have three big advantages over the U.S. Federal Reserve …

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They Didn’t Get Into Trouble in the First Place. You didn’t hear about housing bubbles going bust in most of Latin America. Here, the Fed left credit too loose during the housing boom, giving us the catastrophic 2007-2009 recession. They Haven’t Used Up Their Monetary Ammo. Back in 2008, the Fed slashed its benchmark interest rate to near-zero. Less than three months after the Lehman Brothers bankruptcy, the Fed’s toolbox was empty. In contrast, most Latin American central banks have plenty of room to adjust policy and maintain the crucial balance of inflation, economic growth and exchange rates. Unlike The Fed, They Haven’t Had to Resort to Quantitative Easing. If QE is a stimulus tool, why is the U.S. economy limping along at an anemic 1.5% pace so far this year? Worse, we have an inflationary threat hanging over the economy when the program is finally unwound.

Because monetary policy is so critical, I follow central banks around the globe. I’ve found Latin America has some of the best. They are thorough professionals with enviable credentials. Latin American central banks act deliberately and decisively to implement near-optimal monetary policies.

In fact, I can name a few people in those institutions who would be perfectly qualified to replace Ben Bernanke, if only they were U.S. citizens.

Here is a rundown of current policy in Latin American central banks, with the U.S. included for comparison.

Fiscal issues are challenging Brazil, but Chile, Colombia, Mexico and Peru have their monetary policies dialed in as well as anyone could reasonably expect.

My Global Trend Trader recommendations span the globe. Latin America has about a 20% allocation in our model portfolio right now. With the region’s international leadership in free trade and intelligent, deliberate central banks, I expect to find more opportunities in Latin American securities in the coming months.

The export-intensive Latin American economies could get another boost if Asian demand for iron ore, copper and other natural resources continues the recent upswing. Latin America’s own ever-expanding middle class consumer population will create new demand, too.

Central banks aren’t entirely responsible for any nation’s economic success or decline — but they do make a difference. Latin America — already blessed with abundant resources — now has some of the world’s best monetary authorities, too.

The combination adds up to opportunity. I’m determined to grab it. I strongly encourage you to consider doing the same!

Sincerely,

Rudy