Brazil made news late Monday by imposing a capital inflow tax of 2% in an effort to try to put the breaks on the rapid ascent of the real, the currency. In reaction to the news the Bovespa dropped 2.88%, the iShares Brazil ETF(EWZ) was down 3.82% and the currency, as measured by the WisdomTree Brazilian Real ETF (BZF) dropped 2.12%. YTD those three are up 65%, 120% and 35% respectively. My core holding for Brazil has been Vale (VALE) for several years and a couple of name changes and it is up about the same as EWZ.

A 35% move for a currency is huge to the point of distorting the economic functioning of the country. It was a very big deal when the dollar dropped to 2.00 reals last May. It is now at 1.70 (meaning the greenback is dropping against the Brazilian currency) in only four months.

This has been a good thing for US based investors, that is the reason why EWZ is up so much more than the actual Bovespa Index. In addition to making trade with the US expensive (for Americans) it also makes trade expensive for the Chinese, remember the yuan is (sort of) pegged to the green back so if the real is up a lot against the the dollar it is also up a lot again the yuan.

The decision to impose the tax will either work as they hope or it won't but clearly the action took the markets by surprise. The reasons for the moves up in the currency and the equity market are all still in tact. If you have been involved with emerging markets for any length of time then you know that pullbacks come along of varying magnitudes for varying reasons. The one yesterday may or may not be anything more than the one day, I don't know but I do know it will not be the last time an emerging market gets hit by news the seems out of the blue or goes down for no reason.

Occasionally these things are serious, like with Russia during the bear market, but they do happen. If emerging markets in general all correct then you won't really have anyplace to hide but for the occasional country event the consequence can be mitigated by having a small weighting. For most countries I have had 2-3% weightings and have started to inch that up in a couple of instances (with more to come) to 4-6% which I am quite certain would be my max.

As the subject of country weightings has come up before people ask why so little if I really like a country and stuff like the news from Brazil this week is exactly the reason. One of the risks to investing in certain market segments is events that cannot reasonably be analyzed. The obvious way to mitigate this type of risk is to avoid too much exposure.

For long time readers this will be consistent with how I have been managing country exposure for years having written most extensively about Norway and China in addition to Brazil.

The first picture is Joellyn's favorite from in the hoodoos at Bryce Canyon from Sunday. The second picture was taken by our dogsitter while we were out of town. It is Pee Wee playing with one of his miniature tennis balls; amazing photo.