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Why a slowdown in Brazil is almost as bad as the China slowdown

A shopping district in the Centro neighborhood in Rio de Janeiro, Brazil.
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Can it get any worse for Brazil? Last week the government lowered the country's growth output from a modest gain to a contraction of 1.49 percent. Unemployment, no doubt under-reported, is at 6.9 percent in June and rising.

Dilma Rousseff, the country's president, who had previously been a big spender, is now pushing austerity to maintain the country's credit rating.

To little avail. She is on a collision course with Congress, which wants to raise wages and spend even more. Labor unions are threatening ongoing strikes.

Standard & Poor's downgraded Brazil's outlook to "negative" from "stable" on Tuesday, a clear warning sign they were preparing to drop its credit rating, which is now just one notch above junk.

The Brazilian real is weakening and the Brazilian stock market hit a 6-year low this week.

If that wasn't bad enough, there is talk of impeaching Rousseff, along with several corruption investigations, including an ongoing investigation into a Petrobras kickback scheme, which could lead to a protracted political crisis.

Lower growth. Fiscal imbalances. Labor unrest. Corruption investigations. Protracted political crisis.

This has serious implications for global growth. Brazil, with a GDP of roughly $2.4 trillion, is the biggest economy in Latin America.Their companies are involved in dozens of large infrastructure projects throughout the continent.

All of this is taking an enormous toll on the country's economy, which you can plainly see in the earnings report of several multinationals that reported earnings this week:

1) agribusiness giant Bunge noted that its edible oil business was lower due to much lower margins and volumes in Brazil, "as consumers reduced spending and traded down to lower value products in response to the recessionary economy."

We are talking about cooking oil, folks. People are trading down on cooking oil. That is serious stuff.

Same with milling products: volumes down as customers (food service) cut back. Same with fertilizers. Lower volumes.

2) Owens Illinois, one of the world's biggest makers of glass bottles, reported a drop in volume in Brazil because of a sharp drop in beer sales.

3) Goodyear Tire reported that tire sales in Latin America were down 20 percent compared to the same period last year, due to the stronger dollar against the Brazilian real and to lower tire sales.

4) Industrial gas manufacturer Praxair said organic sales were down year-over-year due to weaker industrial activity in Brazil and China.

5) Whirlpool gets 16 percent of their revenues from Brazil, their second-biggest market after the U.S. Overall Latin American sales were down 22 percent year-over-year, mostly due to weakness in Brazil. They expect demand to be down roughly 15 percent year-over-year in the second half of 2015.

6) Caterpillar gets about five percent of its revenues from Brazil. They reported sales in Latin America were down 26 percent, due mostly due to weak construction activity in Brazil.

From cooking oil to tires to beer to washing machines to construction equipment, it's all down. Double-digits.

And these are just the U.S. companies. Embraer, the big Brazilian aerospace companies, yesterday lowered its revenue guidance for the year, citing the weak Brazilian real vs. the dollar and slower development work on defense contracts.

Where is all this going? For the moment, uncertainty is the only constant. The corruption investigations in particular could slow down much needed investment all over Latin America as executives get paralysis, worried that projects may get cancelled if management is implicated in any corruption.

The battle between those in favor of austerity vs. those in favor of spending more is also being played out in Brazil, with an uncertain outcome.

Could it get any worse? Sure, it just did. They're hosting the Summer Olympics next year, and here is the AP story from yesterday that got massive international coverage: "Athletes in next year's Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games."

Gads. You can almost hear the thud of government officials fainting in Rio.

What to do? Many investors are simply avoiding Brazil altogether. However, the ProShares UltraShort MSCI Brazil, which benefits as Brazil shares decline, has seen a big spike in volume as the bad news has multiplied this month.