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Emerging Markets Are Still a Buy |
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Transparent, liquid, better practices...another look at emerging
markets,
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Three must-see charts to show your rosy, "recoverista" friends,
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Plus, Bill Bonner on Bernanke's spigots and the search for a new
economic model...
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Eric Fry, reporting from Laguna Beach, California...
The recession is over. Everyone says so. Well, not everyone
actually...just economists...especially economists from Wall Street and
Washington.
In a research note entitled, "Return to Normalcy," John Silvia, Chief
Economist at Wachovia, gushes, "With the war against the Great Recession
over, our newly reappointed head of the Federal Reserve now seeks to take
us back to normalcy in the financial markets. Let's trust that he too
ushers in a decade of prosperity.
"After World War I," Silvia explains, "American voters longed for a return
to normalcy and elected Warren Harding, whose administration began a
decade of economic growth. For Ben Bernanke, the return to normalcy we
expect will lead to at least two years of economic expansion but with some
volatility along the way."
Okay, so two years is not quite the same thing as ten years. But at this
point, most Americans would settle for two months of "normalcy."
"Two important indicators - industrial production and leading indicators
index - suggest continued economic growth," says Silvia, explaining his
optimism, "Industrial production registered its seventh straight increase
and these data suggest the economic recovery began in the second quarter
of 2009."
Upbeat macro-economic projections from the likes of John Silvia illustrate
that economics is less a "dismal science" than a "faux science" - guided
by prejudice and misguided by personal experience.
Of course the economists on Wall Street believe the recession has ended.
Why wouldn't they? Former Treasury Secretary, Hank Paulson, shipped enough
taxpayer money to Lower Manhattan in 2008 to employ every Wall Street
economist for life...along with every Wall Street CEO, proprietary trader,
managing director, vice-president, secretary, security guard,
lunch-runner, limo driver and yoga instructor.
Similarly, the economists in Washington have absolutely no reason to doubt
that the recession has ended...because the recession never arrived in
Washington in the first place! Government employment in the Greater
Washington DC region has jumped more than 10% during the last eight years,
while retail employment has gone nowhere. And this divergence has
accelerated as the recession has deepened!
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Unfortunately, the employment trends depicted in the nearby chart are not
the trends that typically produce national prosperity. If government
employment were to continue rising while private sector employment fell,
the economy would become less productive...at least that would be our
guess. (Picture the post office operating every McDonald's in the land).
Thus, the recession may be ending for Wall Street economists and
government workers, but not for anyone else. Adult male workers, to name
just one conspicuously under-employed group of Americans, are hurting
big-time...
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"Male employment (aged 25 to 54 years old) plunged 114,000 in January and
is back to levels last seen in June 1996," observes David A. Rosenberg, an
economist who toils neither for Wall Street nor Washington. "Almost 10% of
what was once considered the 'breadwinner' part of the workforce has been
extinguished during this recession. How could anyone realistically be
excited about recovery prospects knowing this?"
Furthermore, Rosenberg notes, "the average duration of unemployment rose
to a record 30.2 weeks from 29.1 weeks in December; and for the first time
ever, we have more than 6.3 million Americans (up from 6.1 million in
December) who have been looking for a job with no luck for at least six
months. That is an unprecedented 41.2% share of the pool of
unemployment... The level of unemployment today, at 129.5 million, is the
exact same level it was in 1999."
Not surprisingly, therefore, your average American laborer is noticeably
less optimistic than your average Wall Street economist. The Conference
Board's Consumer Confidence Index plummeted from 56.5 in January to 46
this month. Even more telling, the "present conditions" component of the
index dropped more than 20% from January, to its lowest reading since
1983. At the same time, the "business is good" component of the index
dropped to its lowest reading in the 43-year history of the Consumer
Confidence Index.
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If these are the signs of recovery, it is a very strange recovery indeed.
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The Daily Reckoning
Presents: |
Some investors shy away from investing in
emerging markets because they fear that foreign governments may be a bit
shady or because they don't trust the corporate practices abroad. But is
there more to fear at home than on those distant shores? And if so, are
the world's explosive developing markets worth a second look? Chris Mayer
investigates in today's column...
Emerging Markets Are Still a Buy
By Chris Mayer
Gaithersburg, Maryland
Oranges were once expensive luxuries in northern climes. "In 1916," Paul
Fussell writes in Abroad, "oranges, like other exotic things that
had to travel by sea, were excessively rare in England. If you could find
them at all, they cost the shocking sum of 5d each."
Today, we take for granted that we can eat apples and oranges and bananas
all year round if we choose. It doesn't matter where you live. We can eat
strawberries in the dead of winter. In fact, we routinely enjoy goods that
come from places very far from our own doorstep.
"Televisions from Taiwan, lettuce from Mexico, shirts from China," William
Bernstein writes in A Splendid Exchange, a book on trade. Goods
from faraway are so common, "it is easy to forget how recent such miracles
of commerce are."
Such miracles of commerce have redrawn the economic map. The emerging
markets have "emerged," as you will see. For you and me a big opportunity
has also emerged in something called the Great Convergence.
Our story has its roots in the late 20th century, with the gradual spread
of the Industrial Revolution to the developing world. According to
Power & Plenty, a good reference book on trade, the Western world
(ex-Japan) represented 90% of the world's manufacturing output as late as
1953. America's economy alone was nearly half of the world's industrial
output.
During this time, the economic gap between, say, China and Western Europe
grew very wide when viewed in historic terms. But things changed in the
late 20th century. The Great Convergence began. From 1950 on, world
economic growth was, according to Power & Plenty, "quite simply
astonishing." We enjoyed a rolling wave of "economic miracles" through the
decades. Closed economies opened up...and trade expanded.
We can point to the success of postwar Japan...and then to the surging
tiger economies of East Asia. Singapore, Hong Kong, Taiwan and South Korea
grew in leaps and bounds. Finally, we saw the opening up of China, India,
Russia and Brazil. The once-bottled-up energies of these countries poured
out.
Today, we see the handiwork of the Great Convergence taking shape. The
distinctions between "emerging markets" and "developed markets" are
starting to disappear. Indeed, the terms may already be obsolete. Such is
exactly the thesis of Everest Capital, which makes the case in a recent
white paper called The End of Emerging Markets?
"The belief that companies in the US, Western Europe or Japan are better
managed than in emerging markets is also no longer valid," Everest
asserts. "Anyone who has sat through the parade of fraud and corporate
malfeasance of recent years in the US will find it hard to argue
otherwise."
The list of corporate thieves is much longer in the US and Europe than in
the emerging markets. Management teams in the West no longer dominate when
it comes to standards of best practices. Everest speaks with the authority
of a practitioner on this point. "We meet a large number of managements in
emerging market countries, and it is impressive to see how quickly they
have adopted best practices in terms of disclosure, governance and
creating shareholder value."
Everest also makes the case that governments in the West are just as
bumbling as those of emerging markets. More and more, it is the Western
governments that steal too much. Another distinction blurred.
Emerging markets now make up about half of the global economy. Take a look
at the nearby chart, "Let's Call It Even." (Gross domestic product is a
flawed statistic, but it serves as a rough guess of economic size. PPP
means "purchasing power parity," which aims to take out the distorting
effect of different currencies.)
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Not surprisingly, therefore, emerging markets now make up 10 of the 20
largest economies in the world. India is now bigger than Germany. Russia
is bigger than the UK. Mexico is bigger than Canada. Turkey is bigger than
Australia.
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In a stock market sense, these places have also grown up. It used to be
that emerging markets were not very liquid or very big. It was not that
long ago that the IBM shares changing hands in a single day in New York
were worth more than all the shares that traded hands in Shanghai or
Bombay.
Today's emerging markets are large and liquid. As Everest Capital points
out: "In the third quarter of this year, Chinese markets traded more
shares than the NYSE; Hong Kong and Korea traded more than Germany; India
traded more than France; and Taiwan traded more than Italy, Australia or
Canada."
Emerging market companies are also growing faster. In particular, there
are wide gaps in the growth rates of sales and profits. The second key
distinction worth noting is that of balance sheet strength. Emerging
market companies have less debt and cover their debts more comfortably.
All is to say, investors need exposure to emerging markets, or at the very
least, they should not shun them for reasons that are no longer valid. One
of my favorite ways to get exposure to emerging markets is through the
back door, so to speak. Invest in companies, wherever they are, that have
what these economies need or want, but don't have - or can't make. This is
another reason to invest in the commodities we've honed in on - especially
oil, potash, gold and the agricultural commodities.
Regards,
Chris Mayer
for The Daily Reckoning
P.S. I'm also very bullish on natural gas as a way to
meet the growing energy demand of many emerging economies. Right now I've
got my eyes on four specific stocks that I estimate could produce gains
upwards of 250% for early investors. I can't give the names of these
stocks to such a large readership but, if you're serious about investing
in them (and grabbing a one-month trial subscription to my Mayer's
Special Situations research service), I suggest you take a look at
this "dollar offer" my publishers cooked up. In a nutshell, you get a
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And now over to Bill Bonner with today's reckoning from Baltimore,
Maryland...
The depression is alive and well, thank you.
The Dow rose 91 points yesterday. Gold fell $6.
Officially, the crisis is over. Everyone says so. Central bankers and
Treasury officials have been congratulating themselves. It's been a year
now since the end of the world didn't happen. These fellows take credit
for it.
Bernanke said yesterday that he'll keep the monetary spigots wide open for
a while longer...but that's just because the recovery is fragile. He also
talks of an 'exit' from stimulus programs, now that the economy is getting
back on its feet.
Claptrap! Balderdash! Flimflam!
The mainstream economics profession is guilty of dereliction of duty. They
should be telling people that this 'recovery' is a scam. They should be
warning investors that the markets could fall apart any day. They should
be buying gold and selling US Treasuries...and explaining to the
politicians that you can't buy your way out of a depression with phony
dollars squandered on wasteful projects!
Instead, the dopes are patting each other on the back...praising
themselves for saving the planet from destruction.
But what really has gone on? And what's going on now?
Glad you asked.
First, there is a real economic phenomenon going on - the depression. It's
alive and well...and doing just fine. Households are de- leveraging.
Businesses are building up cash. People are losing their jobs. Savings
rates are edging up.
Almost everything is happening as it should.
Depressions are times of falling prices. Markets are always discovering
what things are worth. In a depression, they find that assets - stocks and
real estate primarily - are not worth nearly as much as people thought.
That's why we have our 'crash alert' flag still flying. Prices are
vulnerable to sharp, unannounced drops until they finally get down to real
depression levels. Since that hasn't quite happened yet...we figure it's
still to come.
On the employment front, this depression has put more than 6 million
people out of work. And every month, more people join the unemployment
ranks. So far, so good. The US economy didn't need so many marble
countertop installers and so many mortgage refinancers. (If only something
could be done to get rid of lobbyists!)
But the worst thing about a depression is that it holds jobless people
prisoner for so long. Many of them will become lifers...they'll never work
again.
In that regard, this depression is similar to Japan's 20-year depression,
1990-2010. After the bubble burst, the Japanese...who were aging faster
than any race ever had...figured they needed to get serious about saving
money. So, they cut back on spending...and saved. Domestic spending
collapsed. Fortunately, the rest of the world - especially Americans -
were still spending their fool heads off. And Japan is an export-led
economy. Even so, with its own consumers dragging their feet, the Japanese
economy didn't go very far or very fast.
The Japanese put their vast savings, directly or indirectly, into Japanese
government bonds...helping the government fund its massive stimulus
programs. Of course, the stimulus programs were a waste of money. The
economy never really recovered...and now the government is expected to
have gross debt equal to 200% of GDP next year, according to the IMF.
For reference, the US is expected to reach 100% of GDP next year. Britain
is hard on America's heels with debt at 94% of GDP.
And now Americans are entering retirement savings mode too. The biggest
age cohort - the boomers - need to do some fast saving in order to finance
their retirements. They're cutting back...not just temporarily...but
permanently. They will never, ever again spend money like this did during
the big bubble years 2003-2007. That's what makes for a durable
depression...
Another thing that makes for a depression is a lack of lending. Bank
credit is still falling. Households cut back because they need to get out
of debt...and save money for retirement. Businesses cut back too. New
projects typically don't do well in a depression. Small businesses
struggle...and fail. Big businesses get bailouts and subsidies.
Depressions are times to neither a borrower nor a lender be.
Debt is only increasing at the government level. But that's another story
for another day...
--- Major News Outlet Calls This the "Next Crisis"... ---
THE GREAT AMERICAN "RECOVERY RIP-OFF!"
America on the mend? HORSE HOCKEY!
Here's what's real: Brace yourself for what's about to go down as
the BIGGEST FINANCIAL SWINDLE in world history, engineered by none other
than Wall Street and Washington, DC.
How does their scam work? It's a crafty "triple-swindle" just clever
enough that most Americans won't even see it happen...until it's too late.
The short of it is, every three days, these flim-flam artists use this
strategy to secretly suck wealth out of your savings account. Be prepared.
Details Here.
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And more thoughts...
This afternoon, your editor's aging aunt called from Pennsylvania.
"This economy has been very hard on my family," she explained. "I've got
two sons-in-law...and they're both laid off from their jobs."
"What do they do?" we wondered.
"One drives a truck for a steel producer. The other is in construction.
There's just not much work, I guess."
Nope.
And that's why, despite all the recovery talk, real people are turning
real gloomy. Consumer confidence just registered its lowest reading since
1983. People don't have jobs...and they're beginning to worry that it
could be a long time before they work again. Mortgage demand just fell to
its lowest point in 13 years. State tax receipts are still falling - for
the 5th quarter in a row. And the number of problem banks just rose 27%.
Recovery? Forget it. There is no real recovery. This depression has to run
its course, like it or not.
You've heard us say that a depression is a period of transition from one
economic model to another. You might ask: what's an economic model? And
what economic model are we leaving behind? What economic model are we
going towards? And what's this got to do with monetary and fiscal
stimulus?
Good thing you didn't ask those questions before. We didn't have any
answers. But here is David Goldman with a partial explanation:
"There is some analogy to the Great Depression in the present situation.
Between 1918 and 1939, American agriculture was in permanent decline,
because the end of the First World War reduced demand for American
exports, and because the substitution of the tractor for draught animals
freed up an enormous amount of land set aside for animal feed. There was
nothing to be done but to get the farmers off the land into other
occupations, and that was not accomplished until the Second World War."
The farmers found work in wartime factories...and in military service.
After the war, they took up new jobs, in a new economy with new factories
and new professions.
What work will today's laid-off construction workers find? Darned if we
know.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and
comments. If you would like to send us a few thoughts of your own, please
address them to your managing editor at
joel@dailyreckoning.com
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