There aren’t many hard and fast rules when it comes to investing.

There’s always an exception. Always.

One of the few that’s as close to a rule as you’ll get is that bear markets go out with bang.

Oil dropped 40%. People bought the dip. It dropped another 40%. People bought again. Then it dropped another 40%. Few were left to buy when the bottom time finally came.

There’s countless more examples just like this. Dot-coms. Housing. Uranium. Pretty much every bubble which has come and gone over the years.

Now, there’s a big bounce underway. It’s sucking investors in once again. And this too will likely end the same way so many which have come before it - big losses for buyers who move in too early and big gains for those betting against them all.

Cheap Can Always Get Cheaper

The situation I’m talking about  is Brazil.

It’s something we’ve gone over before in the last few months (here and here).

It’s a political, economic, and budding stock market crisis with opportunity on all sides of it.

Right now, it’s bad. But has history has shown, it can and likely will get a whole lot worse. Given recent events, probably sooner than later too.

If you’ve been following the headlines, you know Brazil is an economic and political quagmire.

There are multiple corruption scandals which go all the way to the top -- both Brazil’s former and current president are closely tied to them.

They’re bad. The full extent of them is probably even worse.

You think the U.S. is corrupt? Well, there’s an inherent limiting factor to U.S. corruption. The government spending only accounts for about 24% of GDP.

According to data compiled by Statista, government spending accounts for 41% of GDP in Brazil. That’s relatively a lot more money, a lot more ways to funnel it to yourself or family members.

For years though, not many Brazilians worried too much about it.

The commodity-driven boom have spread the wealth through Brazil’s large agriculture, mining, and energy industries.

That’s not the case anymore.

Brazilian GDP has been in a recession for four years straight.

Everyone watches U.S. GDP closely to see if it drops for two straight quarters to signal an “official recession.”

If that’s the measure, Brazil’s in a depression and has been for years.

Just look at Brazilian stocks to see how bad it is.

Brazilian stocks, as tracked by the iShares MSCI Brazil Capped (EWZ), fell 78% from their 2011 and lows earlier this year.

They’ve rebounded exceptionally strongly recently though. They’re up more than 50% since January lows.

However, they’re still down 65% from their 2011 level and, considering the economy and political situation, not as cheap as they can or likely will get.  

Yesterday, we saw how much cheaper they can get.

Brazil’s president was finally impeached by the lower house.

Two hours later though a technicality was discovered and the impeachment vote was nullified.

Throughout the chaos, Brazilian stocks dropped as much as 10% at one point on the day which shows how big the risks are here.

That’s why we continue to warn, Brazilian stocks may be cheap, but they could get much cheaper very soon.

Making The Worst Of A Bad Situation

Now, I’m not going to tell you I’m a master of Brazilian politics.

I’ve learned a lot in the last few months, but certainly not in position to understand the details or the likely outcomes for the political figures.

I can tell you the economic situation, how similar situations have played out in the past, and what’s the most likely next move for Brazilian stocks.

That’s simple. And potentially profitable too.

As we said before, the combination of events -- global stock rebound, commodities bouncing back, and the very potential of a new government in Brazil -- has brought a renewed hope to Brazil.

Time, we expect, will dash those hopes and send Brazilian stocks back to old lows and possibly even lower.

The reason?

All the possible outcomes are bad for Brazilian stocks.

The current rally in stocks around the world will have another date with reality in a few weeks when the next earnings season kicks off. The last earnings season saw the greatest sell-off in stocks in four years. Is there any reason to expect this one to be any different?

The current rally in commodities isn’t driven by any strong fundamentals either. The U.S. economy continues to muddle along and it’s the probably one of the strongest in the world. Where is the renewed commodity consumption going to come from?

Finally, even if the president of Brazil impeached, what’s the odds of the next president being any different? Brazil was an economic backwater for thirty years before the commodity bull market came along and it has immediately returned to one when commodity prices started falling. Will a new president quickly change everything when the rest of the government is the same?

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