BRICs, Europe, Obamanation Bad Bets for Investors

The economic future of the BRICs deserves particular scrutiny, as over-optimistic projections of future BRICs growth has already led to more than one global commodities bubble.

In China, the economy is slowing and there is a gigantic morass of bad loans in the banking system, perhaps five times the size of the bad loans about which everyone worried a decade ago. A 2008-style banking collapse and government bailout in China seems inevitable – and we know what that does to an economy!

In India the fine Vajpayee government of 1998-2004 was replaced by an ungrateful electorate with a return to the socialist Congress party, which had wrecked India’s economy from 1947-1990.

The budget deficit in India, by both the central and regional governments, is gigantic now and is “crowding out” the private sector from the financial market. We also can expect a surge in inflation and a balance of payments crisis. Fortunately, there’s another election in 2014; we can hope that the Indian voters do a better job than in 2004.

As for Russia, Vladimir Putin has effectively established himself as President for life, and has taken control of the economy’s major sectors. The Rosneft buyout of TNK-BP indicates that the Russian state will use its resources to assert economic control. This is already working poorly, and it will stop working altogether when the price of oil drops.

Finally, Brazil is meddling in its major companies such as Petrobras and Vale, whose results have sharply deteriorated. Public spending is way out of control, mostly through subsidized loans from the state bank BNDES. Like Russia, Brazil will fairly quickly run into a balance of payments crisis and certainly won’t enjoy its past rapid growth.

Since investors saw BRICs as a bloc on the way up, they will almost certainly panic simultaneously about all four on the way down, and cause a global financial crisis involving all four. That’s if the Eurozone’s problems or Japan’s government debt don’t cause one first. _Busting BRICs

China's economy is a giant, unstable, and corrupt bubble . . .

...90 percent of the richest 20,000 Chinese are “related to senior government or Communist Party officials....

The cronyism is endemic to the Chinese economy. It is horrifically illustrated by the disposition of hundreds of millions of Chinese. According to geographers Richard Walker and Daniel Buck, this disposition of Chinese citizens has occurred via cronyism and the great giveaway of state enterprises to friends and family of Chinese officials. Village enterprises have collapsed. And the great economic expansion has totally transformed countryside farming.

... Exports make China highly dependent on other economies across the globe, especially the U.S., Europe, and Japan. Recognizing this interdependency and the brutal decrease in exports in 2007-8, the Chinese government in November 2008 injected $585 billion stimulant and urged Chinese banks to aggressively loan money at low interest rates. This has led to municipalities in China taking out massive loans, incurring massive debt and engaging in urban expansion and real estate speculation.

In other words, China is currently in a very severe real estate bubble. _Unstable China

The slow motion train wreck must be allowed to run to completion. Collapse, self-destruction, whatever you wish to call it . . . Shoddy materials are finding their way out of China into the construction industries of other countries. Chinese style collapse of tunnels, bridges, and other large construction projects are likely to be more common outside of China -- as they are inside China -- as a result.

As for Europe and Obamanation, all of these governments share common fundamental mistakes in the way they have attempted to compensate for the effects of over-spending in the face of lower revenues:

...financial repression has become a fixture in a new economic paradigm, but it is [not] likely to provide a permanent solution. Financial repression will remain in place as long as bank failures and sovereign defaults continue to be prevented, e.g., through bailouts, asset purchases or debt monetization by central banks. Overall economic conditions in Western countries can therefore be expected to remain stagnant or to deteriorate. The continued debasement of major currencies, such as the U.S. dollar and the euro, will reduce the real value of debts but monetary inflation cannot create a genuine economic recovery as long as bank balance sheets and government finances remain impaired. Without robust economic growth, however, both the banking system and the finances of Western governments certainly will remain impaired. In other words, financial repression in the U.S. and in Europe is set to remain in place indefinitely.

Under an ongoing regime of financial repression, savings, jobs, economic opportunity and living standards will all suffer. The middle class will be reduced as generations of socioeconomic progress are gradually reversed. Younger people, mired in stagflation, will be left behind in terms of income and economic opportunity, which will have a long term negative impact. Since U.S. banks stand to profit from financial repression, it will increase income disparity and the concentration of wealth. The destructive forces set in motion by financial repression will greatly increase the burden on government social welfare programs. Thus, financial repression will fail to alleviate government debt unless tax increases and austerity measures follow, which could turn the United States into another Greece. In theory, financial repression, together with other measures, can liquidate government debt but, in practice, it is a destructive and highly destabilizing approach that will result in a net loss of wealth to society. _Financial Repression

In Europe, we will see more bailouts as the dominoes of bad government and demographic decline continue to topple. In the US, we are likely to see massive bailouts of profligate state and municipal governments including California, Illinois, and New York. Such gaudy payoffs to corrupt political supporters of Obama will not only worsen the general economic state of the US, they will worsen the general demoralisation of large areas of the country that have maintained their finances in a more responsible manner. Call it crony financial repression on steroids.

Be alert, and keep your options open as far as possible.

Can Oil Prices Rise Indefinitely Without Strong Economic Recovery in Europe and the US?

Clouds of recession hover over Europe and are threatening the US, unless significant policy changes are enacted from those existing now. Most advanced nations also suffer from both exploding debt and a demographic decline of their core populations.

Unless the world's wealthy nations resume the buying spree of the "economic bubble period" of the 1990s and early 2000s, rapid economic growth in exporting nations of the emerging world and third world nations remains in doubt.

What would be the effect of such a "top-down economic stagnation" on global oil and commodities prices?

The article below, which considers that question in an oblique fashion, is adapted from an article previously published on Al Fin Energy blog

Why are oil prices so much higher now than they were prior to the 2000s? Much of the difference has to do with the steady stealth devaluation of the US dollar, reflecting the US government's massive debt and deficit spending practises.

Compared to the price of oil in 2010 dollars -- or to the price of oil in gold -- prices prior to the year 2000 were not so much lower as we might think. Two price spikes prior to the year 2000 were comparable to -- or higher than -- our current inflated oil prices.

But there is more to the story than the pitiful performance over time of the US dollar. An explosion of demand for oil from emerging nations -- from the late 1990s to the present -- explain a great deal of the ongoing oil price bubble. Particularly when one takes into account government subsidies for oil which hold the cost of oil use artificially low from Mexico to Venezuela to many MENA countries, China, India, and beyond.

This explosion in demand was the natural result of exploding populations in those countries combined with an emerging consumption sense within those populations fed by global media and a subsequent growing sense of entitlement.

Oil in Nominal vs 2010 Dollars

Comparing oil prices in "dollars of the day" vs. oil priced in either standardised 2010 dollar or gold, brings out more aspects of the dynamic than are generally discussed.

Oil in Dollars vs Gold

In addition to the ongoing stealth dollar devaluation and the demand explosion from the emerging world, oil has become a deeply emotional repository of value for many investors -- reflecting a widespread belief in oil scarcity -- or "peak oil". Savvy traders have exploited this superstition by helping to bring about multiple whiplash spikes and troughs of oil price -- which in the aftermath often leave the smart traders richer, and the superstitious true believers that much poorer.

Of the three drivers of higher oil prices mentioned above, the most likely candidate for the "largest" contributor, is demographic change. Let's look at why this "largest contributor" may not end up being the most important long term contributor to changes in oil prices.

We all know that commodity prices depend upon both supply and demand, as well as a number of somewhat arbitrary and changeable government policies, mandates, regulations, taxes, prohibitions, and other caprices of the generally clueless political class.

Demographic change affects both supply and demand, but demand is the more immediate factor affected by the type of population growth we have seen recently. The explosion of both populations and demand in emerging nations shook the ability of national oil companies to respond -- in large part due to a corrupt failure to pay for necessary maintenance and technological upgrades in oil production. And since most conventional oil reserves fall under the control of corrupt national oil companies, the demand explosion was not immediately accompanied by an equivalent explosion in supply. This mismatch pushed oil prices upward.

But population growth without the ability to pay for more commodities, will not necessarily convert to higher demand, and higher prices. If the regions of population growth cannot pay for more commodities, they will either go without or will be the recipient of unearned aid from wealthier countries.

This is what we are beginning to see across Africa, much of Asia, and other parts of the third world and emerging world. As advanced world demand for the products of emerging and third world nations drops, the ability of third world nations to pay for imported commodities likewise drops.

It so happens that the prospects for advanced world economies is looking more and more dim, while the other bubble -- the demographic bubble -- deflates.
More:

Between the Baby Boom of 1945-1964 and the “baby bust” that followed it, the result is a projected ballooning in the relative numbers of the elderly. From 12% of the population today, the proportion of those over the age of 65 is forecast to rise to 25% by 2030 — and stay there for decades afterward.

We are about to be hit by a double whammy, in other words. On the one hand, a rapid escalation in public spending — not so much for pensions, though that is part of it, but for health care. Not only will more of the population be over 65, but a greater proportion of them will be living past 80, 90 and beyond. And the longer they live, the more they tend to cost. _NP

Old people do not typically use as much oil and other commodities, they do not build as many houses, or buy as many cars -- as a rule.

Demographics are economics. The advanced countries with the worst demographics problem and the advanced countries with the most uncertain economic futures are often the same. High social spending promised to aging generations that aren't supported by enough young workers leads to the kind of debt crises, economic stagnation, and political upheaval that we can see sweeping Europe -- and might yet lie ahead for a country like Japan. This is ironic, in a way. Two centuries ago, Malthus said that growing populations would tax growing economies. In fact, it's stagnating populations that constrain economic growth in rich countries. _Atlantic

With the contraction of demand from economies in the advanced world, comes a reduction in ability to pay for both luxuries and necessities -- including commodities -- in the emerging and third worlds.

That is not the worst of it. Piling on top of the debt and demographic problems of the sinking nations of the advanced world, is an amazingly destructive dysfunctional energy ideology which threatens to sink many of these nations -- both individually and in groups -- beneath the waves.

Intelligent people understand that the intermittent unreliable energy sources such as big wind and big solar, cannot supply more than a small portion of grid power, without destabilising the grid itself.

Nations of the advanced world -- the ones that thrive -- will discover and develop more sources of energy, and will learn to do more with less at the same time. Improved efficiencies and productivity will contribute to the declining demand for imported commodities which will also be driven by the declining demographic.

Increasing use of robotics and other automation will help to raise productivity, even as core populations decline. But energy will always be key. Newer, cleaner, cheaper, safer generations of nuclear energy will be a long term solution, but we will need to utilise our large supplies of conventional and unconventional hydrocarbons to get us there.

Which is why the energy starvationists -- from Merkel to Obama to Gillard and beyond -- will have to be moved out to make way for a better future.

Where Did All the Global Growth Go, Long Time Passing?

A year ago, economic analysts were giddy with optimism about the prospects for economic growth in the developing world. In contrast to the United States and Europe, where the growth outlook looked weak at best, emerging markets were expected to sustain their strong performance from the decade preceding the global financial crisis, and thus become the engine of the global economy.

Economists at Citigroup, for example, boldly concluded that circumstances had never been this conducive to broad, sustained growth around the world, and projected rapidly rising global output until 2050, led by developing countries in Asia and Africa. The accounting and consulting firm PwC predicted that per capita GDP growth in China, India, and Nigeria would exceed 4.5% well into the middle of the century. The consulting firm McKinsey & Company christened Africa, long synonymous with economic failure, the land of “lions on the move.”

Today, such talk has been displaced by concern about what The Economist calls “the great slowdown.” Recent economic data in China, India, Brazil, and Turkey point to the weakest growth performance in these countries in years. Optimism has given way to doubt.

...Consider India, which demonstrates the limitations of relying on services rather than industry in the early stages of development. The country has developed remarkable strengths in IT services, such as software and call centers. But the bulk of the Indian labor force lacks the skills and education to be absorbed into such sectors. In East Asia, unskilled workers were put to work in urban factories, making several times what they earned in the countryside. In India, they remain on the land or move to petty services where their productivity is not much higher. _Source

A lot can change in a year's time. Europe and the US are headed toward recession. Australia and Canada are looking at assorted financial bubbles in danger of bursting. And the emerging nations are threatening to catch pneumonia from the more developed world's cold virus.

Has China's rise peaked? If one were to pose this question a few years ago, he would probably be laughed out of the room. The conventional wisdom then was that China's rise was certain to continue. But today, this question is very much on everyone's mind.

... For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved. Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth. The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.

Short-term difficulties are not the least of Beijing's worries. In the coming decade, many of the favorable structural factors that have helped power China's double-digit growth in the past two decades are going to disappear. Topping the list is the demographics. The proportion of the Chinese population of working age peaked in 2011 and has started decreasing in 2012, according to a RAND study. At the same time, the share of the elderly in the population is beginning to rise rapidly. In 2010, 8.6 percent of the population was 65 and older. By 2025, the figure will likely be 14.3 percent. An aging population will increase labor costs, reduce savings and investments, inflate healthcare and pension costs — and slow down growth.

Another difficult obstacle ahead is environmental degradation. Beijing has neglected environmental protection for the sake of rapid growth. But the costs of environmental degradation have become unbearable, both economically and politically. Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP. China's long-suffering population has finally begun to fight vigorously for their environmental rights. This year alone, large-scale protests forced the government to cancel plans to build plants that would threaten the health and livelihoods of the residents in two Chinese cities. In the decade ahead, the combination of environmental degradation and the effects of global warming will further drag down Chinese growth. _Diplomat

More at the article linked above.

China is in danger of many other types of near to intermediate-term degradation than mere environmental degradation. Degradation of poorly constructed infrastructure is inevitable, as is degradation of social and national cohesion.

More: Can Global Growth be Saved?

The true picture for most of the developed and emerging worlds, is actually much worse than can be contained in the phrases "slow growth," "no growth," or "negative growth." The true picture can best be described by the phrase "on the brink of disaster."

But since a combination of wise, selfless, and heroic leadership would be required to overhaul the government systems of developed world nations as well as the BRICS and the third world, don't hold your breath.

India Is Not Ready for Prime Time

The following article was previously published on Al Fin Energy blog

It is no mystery to most people who follow the news that India suffered two massive power outages last week. But what is less well understood, is that large parts of India's population suffers power outages on a regular basis.

India's power generation infrastructure is woefully undersized and inadequate for the growing customer base. Government regulation of the power industry makes it very difficult for producers to operate profitably. Electricity theft in India is common. And getting anything done in India -- in terms of new infrastructure or power generation -- involves navigating a treacherous obstacle course through the many inevitably corrupt levels of India's governments.

Here is more on the dark reality:

...power failures are a daily occurrence for [most] of the population—or at least the two-thirds of India's 1.2-billion inhabitants who actually have any electricity supply. But they are not for India's elite. For the latter, power guarantees power. The bureaucrats in charge of Delhi's grids switch off the supply to hospitals before they plunge the homes of top politicians into darkness. But this time the lights did go off. And so the residents of the most upmarket parts of the city—so confident of their power supplies that they do not have generators—had to sit in the fetid monsoon temperatures of 35 degrees like everyone else.

The north Indian power failure, possibly the biggest in the history of mankind, affected an estimated 700-million people. It was a global news story. It revealed the parlous state of Indian infrastructure and provided a dramatic example of how public institutions have failed to keep pace with economic growth. And it also revealed quite to what degree the conclusion, so deeply rooted in the West, that India is not only "shining" but will only get progressively shinier, is complacent in the extreme.

...it is increasingly difficult to reconcile the optimism surrounding India with the reality. In a recent book surveying the developing world, analyst and investment banker Ruchir Sharma says that India has, at best, only a 50% chance of becoming what he calls "a break-out nation". A reversal of recent fortunes is also a possibility, he argues. Other countries have suffered decline after a period of rapid growth. But this thought barely appears to have occurred to Western policymakers. Few stop to interrogate the narrative of inevitable, inexorable Indian success. Take, for example, the famous Indian "middle class". If defined in Western terms, as people with salaried jobs, a car, the odd overseas holiday and an apartment or even house, then Indians fitting this category cannot number more than a couple of percent of the population at best. A local definition, given to me by a young man in a cheap restaurant, are those who can afford a cup of coffee. The cappuccino-sippers are infinitesimally few, albeit more numerous every year.

...if other countries can live with a few slow periods, India cannot. Stasis is not an option. Hundreds of millions of young people will be pouring on to the labour market in coming years. They will need to find homes and healthcare as well as jobs. Most have been only partially educated in substandard establishments.

They suffer a grave lack of skills. More than a third will have been malnourished when infants. Horrific gender imbalances due to the pre-or post-natal killing of girls will mean a serious shortage of partners for young males.

Driving through the poor, if improving state of Bihar, on a late summer evening a year ago, the sight in every town I passed through, of large numbers of young men, some evidently drunk, out on the streets in the gathering dusk, brought home quite how easily India's "demographic dividend" could turn out to be the opposite. In worst-case scenarios, the consequence of a combination of tens of millions of people with unrealistically high aspirations, deteriorating prospects of improvement and a consistently mediocre standard of living will be high levels of social unrest. _Mail&Guardian (*irony alert!)

* The "irony alert" refers to the source for this story, South African newspaper Mail & Guardian. South Africa is certainly in no position to lecture India about corruption, a youth population with "a grave lack of skills," or power outages.

Of course the problem of a lack of skills is not unique to the third world or to emerging nations. The grand educational experiment in social justice and equality (government schools and the push for all school children to eventually go to university) for much of the developed world, has helped to eliminate most of the general competencies from the general population.

So even the developed world suffers a shortage of competent workers, while it hires PhDs to drive taxis and to mop floors.

And the power grid and infrastructure that modern green rulers of the developed world yearn for: smart grids powered by big wind and big solar? Such a system would be an eternal nightmare for grid managers and industrial customers -- to say nothing of the average power consumer.

India has a very difficult road ahead. But even the developed world is digging a deep energy hole and competency hole for itself.

The best advice for western voters, come the next local and national elections, may be to pull out the long knives (metaphorically speaking). The privileged political, media, and academic classes may not understand the dire nature of modern decline until they are forced to see many heads roll (metaphorically speaking), over and over again.

More: Details behind India's dramatic grid collapse

Half of India Goes Dark

The following article was first published on Al Fin Energy blog

"Even before we could figure out the reason for yesterday's failure, we had more grid failures today," said R. N. Nayak, chairman of the state-run Power Grid Corporation. _Reuters

Reuters_via_TheGWPF

India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving 620 million people without government-supplied electricity for several hours in, by far, the world's biggest blackout. Hundreds of trains stalled across the country and traffic lights went out, causing widespread traffic jams in New Delhi. Electric crematoria stopped operating, some with bodies half burnt, power officials said. Emergency workers rushed generators to coal mines to rescue miners trapped underground. _AP

A modern power infrastructure requires constant upkeep, maintenance, and piece by piece replacement, as various parts inevitably break down and go bad. If a nation -- even a nation of over 1 billion persons -- is unable to support its massive critical infrastructure, the lights will tend to go out from time to time.

Stretching from Assam, near China, to the Himalayas and the northwestern deserts of Rajasthan, the outage covered states where half of India's 1.2 billion people live and embarrassed the government, which has failed to build up enough power capacity to meet soaring demand.

"Even before we could figure out the reason for yesterday's failure, we had more grid failures today," said R. N. Nayak, chairman of the state-run Power Grid Corporation. _Reuters

This is par for the course across most of sub Saharan Africa and much of third world Asia. And it is a preview of coming attractions for much of the developed world, which is being slowly transformed -- piece by piece -- into a reasonable facsimile of the third world, itself.

If people are attempting to maintain a high tech infrastructure which they do not understand, failure is guaranteed. Not merely intermittent failure, but ultimate failure.

The only alternative in such cases is to solicit outside help from those who do understand the technology.

Of course in India's case, there are large numbers of persons who could repair and upgrade the byzantine power grid. But the massive levels of corruption at every level of India's government essentially guarantees that the best persons for critical infrastructure jobs, will not be the ones who are paid to do those jobs.

In Africa, the permanent infrastructure problems are due to a lack of skilled and trainable manpower, and the general inability to pay outsiders to make up for the intrinsic lack of competence. In MENA, where average manpower competence is slightly better than in sub Saharan Africa, oil rich states can pay outside service companies to keep the power on for most of the 24 hour day, at least.

But India is a special case, with almost 1.4 billion people, and perhaps the widest population variance in basic competencies of any large modern or emerging nation -- from very high to very low.

Which makes India something of a preview of coming attractions for much of Europe. Europe's demographic picture is changing very rapidly, to resemble that of emerging nations such as India, or perhaps Brazil.

Perhaps it is time to stock up on long-burning candles?

More:

....any connection to the grid remains a luxury for many. One-third of India's households do not even have electricity to power a light bulb, according to last year's census. _AP

Power shortages and a creaky road and rail network have weighed heavily on India's efforts to industrialize. Grappling with the slowest economic growth in nine years, the government recently scaled back a target to pump $1 trillion into infrastructure over the next five years.

Major industries have their own power plants or diesel generators and are shielded from outages. But the inconsistent supply hits investment and disrupts small businesses.

High consumption of heavily subsidized diesel by farmers and businesses has fuelled a gaping fiscal deficit that the government has vowed to tackle to restore confidence in the economy. _Reuters

Of the BRICs, not a single one is up to the task of leading the global economy out of the doldrums. The opposite is more likely to be the case.

So, think! What will faltering economies in the BRIC nations do to global commodities pricing, and the global economic picture as a whole?

BRICs: Can the Tail Wag the Dog?

Ever since the 2008 collapse of the great global economic bubble, the hopes of the chattering economic classes have ridden on the BRICs -- the emerging economies of Brazil, Russia, India, and China. Aside from Russia, the BRICs have population heft and momentum, something most of the more advanced nations cannot claim. There is also a sense in those countries that it is somehow "their turn" to excel.

But what if the BRICs are only the tail to the global dog? If the dog is sick, can we really expect the tail to do everything the dog would normally be able to do?

The BRICs have been exporters to the more developed economies. But the more developed economies are sinking under dysfunctional policies and leaders. Can the BRICs succeed and prosper without developed markets to buy their resources and products?

Champions of the Submerging World
China is economically dependent upon exports to Europe and North America -- markets that have not been doing well over the past few years. Brazil is economically dependent upon not only Europe and North America, but is very much dependent upon Chinese demand as well.

As goes China, so goes Brazil. China's insatiable appetite for oil has benefited Brazil over the past few years. If China's economy continues to lose momentum because of the European crisis, that will impact Brazil ... even if Brazil doesn't have as many direct ties to Europe's consumers and banking system.

"Brazil is a play on China. There are concerns that Brazil is overexposed to China," said Carlos Constantini, head of research at Itaú BBA, an investment bank in São Paulo. That's a big reason why Brazil's benchmark Bovespa stock market index is down more than 6% year-to-date.

India's sharp decline is perhaps the most surprising since that economy was thought to be the least exposed to Europe. Russia, however, could really suffer if the global economy doesn't show some signs of life soon. Crude oil prices have plunged below $100 a barrel to the mid-$80s. Crude prices are now down more than 20% from their highs of the year. And oil could dip further if the Euro-wreck leads to significantly lower demand for crude worldwide.

"Russia was a darling for awhile and there was all this talk about how oil would never fall below $100 a barrel. Their economy is so levered to oil and commodities and they haven't been able to diversify." Mata said. _Thick as a BRIC

Cracking BRICs
It is true that India's economy -- despite minimal exposure to the European crisis -- is starting to slump. India is still desperately poor, after all, and its government is abysmally corrupt. Nothing kills a nascent economic boom so quickly as greedy governments.

One interesting development out of all this economic turmoil, is that Russia's Putin is turning to the Russian far East and to Russia's relationship with China, in an attempt to hedge his global bets.

Much of Putin's far East and China strategy should be seen as wishful thinking: China's population is still on the ascendancy, looking for lebensraum, while the ethnic Russian population is steadily shrinking away and leaving a huge void.

Putin's attempts to engage China in joint industrial and technological enterprise are likewise built on shifting sands. China has always appropriated the intellectual property of its "partners," and proceeded to to make pirated and counterfeited products. Russia is feeling the sting from multiple thefts of designs of planes, ships, submarines . . . If Putin proceeds with his farcical plans (see above article link), Russia will feel that sting yet again . . . and again . . . and again . . .

When Putin attempts to lock China into a long-term gas contract at today's inflated prices, he will be bucking the tide of China's development of its own vast shale gas resources. Somehow, it is unlikely that China's leaders will be amused at Putin's condemnation of the "fracking" process, which China is using to develop its tight gas deposits. Particularly when Russia is using the exact same fracking process to develop its own shale resources in Siberia.

An attempt by BRIC nations to circle the wagons and to feed each others' prosperity -- without outside input from the more developed economic world -- is not likely to succeed at this early stage. But it is possible that the US will eject the anti-free market and anti-energy policies of the Obama administration, in November's election. And it is possible that at least some countries of Europe will turn away from demographic decline and the green dieoff agenda.

If those things should happen, the health of the dog may be restored, and the tail may be set to wagging once again.

Drastic Economic Slowdowns Predicted for China and India

Conference-Board via NextBigFuture
Since the global economic downturn of 2008, the economic hopes of the world have been pinned upon China, India, Russia, and to a lesser extent Brazil. But a quick glance at the chart above displays the drastic downturn in economic growth predicted for China, India, and Russia. Brazil has some significant question marks hanging over its economic future, as does much of the rest of Latin America.

This is all very bad news for those economies that are dependent upon commodities exports for their economic livelihood. That is because the ongoing economic slowdowns in the US and Europe offer no near-term hope for increased demand for oil or other commodities, and with the projected reduced growth in the BRICs as well, the popular projections for an exponential growth in demand for oil & commodities appears to have been built on a foundation of sand.

Advanced economy growth is expected to slow down from an already meager 1.6 percent in 2011 to 1.3 percent in 2012. For 2013-2016, the outlook suggests some recovery in advanced economies, bringing these countries back to the pre-recession growth trend of a little more than 2 percent.

In 2012 emerging economies will slow in growth by 1.3 percentage points on average, going from 6.4 percent growth in 2011 to 5.1 percent in 2012, partly as a result of slower export growth and partly because several of them have been growing above trend. From 2017-2025 emerging and developing countries are projected to grow at 3.4 percent. Many economies will begin to show signs of maturing, at which point the rapid catch-up growth abates.

The greatest challenge for the global economy in this slow growth environment is to raise productivity without losing job opportunities for the millions who are looking for reasonably paid jobs to support their living standards. The growth rate of per capita income globally has been around 2.4 percent since the beginning of the century but sometime between 2017 and 2025, this rate will fall below 2 percent. In contrast to the past half century, that slowdown will also be accompanied by slower growth in population. _Conference-Board_via_NextBigFuture

Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2012 - 2025 (November 2011)

	2012 - 2016			2017 - 2025
	GDP Growth in Optimistic Scenario	GDP Growth in Base Scenario	GDP Growth in Pessimistic Scenario	GDP Growth in Optimistic Scenario	GDP Growth in Base Scenario	GDP Growth in Pessimistic Scenario	Distribution of World Output 2020
US	3.6	2.1	1.5	3.1	2.3	1.8	18.2%
EU-15*	2.7	1.6	0.5	2.4	1.7	1.0	16.2%
Japan	2.4	1.1	-0.2	2.1	1.5	0.8	4.9%
Other advanced**	3.0	2.5	2.2	2.0	1.7	1.4	7.8%
Advanced Economies	3.1	1.9	1.1	2.6	1.9	1.3	47.0%
China	9.7	7.0	3.8	4.9	3.5	3.0	22.0%
India	7.8	6.4	4.5	5.6	4.6	4.2	8.5%
Other developing Asia	5.0	4.1	3.4	4.6	3.8	3.1	4.3%
Latin America	4.0	3.3	2.9	3.8	3.2	2.8	7.4%
Middle East	4.6	3.7	2.8	4.2	3.5	2.8	3.4%
Africa	4.6	3.8	2.9	4.6	3.9	3.5	1.9%
Central & Eastern Europe	3.0	2.4	1.7	2.3	2.0	1.7	2.7%
Russia and other CIS***	3.2	3.1	3.0	2.2	1.1	0.0	2.9%
Emerging Market and Developing Economies	6.4	4.9	3.4	4.3	3.4	2.8	53.0%
World	4.8	3.5	2.2	3.6	2.7	2.2	100.0%

Table Source

It should be re-iterated that with the expected drop in demand for commodities by emerging nations such as India and China (as well as by OECD economies) over the next decade, and the likely price-driven increases in supplies for energy commodities such as oil & gas, it is unlikely for energy or commodities shortages to occur on any wide scale during this time -- except as caused by political and governmental action or decree.

When BRICs Crumble, Will Commodity Prices Collapse?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?

China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish

Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.

Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.

BRICS: A False Economic Dawn?

The economies of the western world are struggling to emerge from an ongoing crisis of their own governments' making. Big global investors have placed much of their hopes on the BRICS nations: Brazil, Russia, India, China, and (sometimes) South Africa. All of the BRICS face serious problems, both domestically and regionally. Is it wise to base one's investment hopes on countries which are facing so much turmoil of all kinds?

Poverty
Poverty is a dangerous problem for any country to have, as it not only prevents people from maximizing their potential, but it also represents a dangerous store of resentment and potential political instability. Poverty is a significant issue in Brazil and India, as roughly one-quarter of those populations live below their country's poverty lines.


Unequal distribution of wealth is a similar problem, and perhaps even more problematic from an investment statement as a voting populace may look towards politicians that promise to address this inefficiencies with business-unfriendly practices (as has happened in Venezuela). Brazil scores very high on lists of inequality (as measured by the Gini coefficient), and China is quite high as well (many people do not realize how poor the Chinese living in the countryside are). In comparison, Russia and India are much closer to the standards of the Western world in terms of income distribution.


Corruption
Where there are poor people and histories of authoritarian governments, there is often corruption as well. By its very nature, corruption does not usually leave a clear paper trail, so measuring it is difficult. Transparency International's Corruption Perceptions Index may not be a perfect methodology, but its insights are interesting all the same.


Brazil's ranking of 69 is too low to be seen as good, but it is the best among the BRICs - Russia scores the worst at a very low 154, while China and India come in at 78 and 87, respectively. In Russia, is not uncommon for organized criminals to own key companies (or control entire industries) right alongside government officials, while Chinese officials are often paid to look the other way when it comes to violation of laws and standards, securing contracts, or obtaining privileged access to capital or resources.


Rule of Law
The idea of the rule of law is closely related to corruption, but it in this case it refers to the clear and consistent application of laws and regulations to all parties in a country. In Russia, for instance, it is commonplace for countries that are "friendly" with government officials to get preferential treatment and for government officials to punish uncooperative companies through pseudolegal means. Although the worst excesses of Russia's erratic application of rules and laws seem reserved for internal matters (the infamous Yukos case, for instance), many Western companies like BP have run afoul of shifting rules and arbitrary enforcements.


Though not the same as rule of law, excessive rules and law can also be a significant problem. India is a good example of the inconsistencies and frustrations to be found in emerging investing. While India has a well-developed democracy, it also has a crippling bureaucracy, byzantine rules and regulations, and a depressing level of corruption (though a promising trend of improvement here). All in all, then, it is not hard to start a very small business in India, but trying to establish a large scale enterprise can be especially difficult.


Infrastructure
While Brazil, India and China are thought of as emerging countries forever putting up new buildings and public projects, Russia has the opposite perception - a country that has seen its physical and intellectual infrastructure hollowed out by the collapse of the Soviet system and the inconsistencies of government policy since then. Much of Russia's infrastructure is frankly not in the best of shape and this makes transporting goods and conducting business more challenging. Along similar lines, while Russia used to turn out large numbers of talented engineers, the university system has fallen into disrepair and disrepute and Russia is often challenged to find the motivated and talented people it needs to compete in advanced industries.


India also suffers from a very large population, quite a lot of poverty (one-quarter of its people living below the country's own poverty line), and a relatively poor infrastructure. Access to clean water and sanitation is still problematic in some rural areas, and the traffic jams and overcrowded railways are legendary. _SFGate

Sick as a BRIC

Understanding Third World Corruption: India

Headwinds for Emerging Markets

Next crisis to arise in BRICS

The Al Fin blog has devoted a lot of space to the underlying problems of China and Russia. But readers should take a good look at the article on Indian corruption linked above. Brazil is a special case, since it enjoys proximity and relatively good relations with North American markets and business. But the underlying weaknesses of Brazil should encourage caution in prospective investors. South Africa would be more properly seen as a nation being readied for a downward trajectory -- similar to Zimbabwe's -- rather than a nation of great promise.

You cannot blame big investors and analysts for trying to find economic promise somewhere in the world. That is what they do. But you cannot believe very much of what they tell you either, when being sold investments. If the governments of Europe, North America, and Oceania have killed the goose that lays the golden eggs, by chasing after energy starvation, carbon hysteria, and a false dream of perpetual affluence and security without work, how stupid is it for those same countries to expect nations which are essentially still members of the third world to bail them out of their self-made quagmires?

The king troublemaker is the US, of course. Obama's quest for infinite government debt -- underwritten by overseas investors -- is a folly of unprecedented proportions. Obama's desire to flood the US with uneducated, impoverished, poorly assimilable immigrants from the third world -- to boost his political power and that of his cronies -- is another great folly. Obama's ongoing agenda of energy starvation and the continued suppression of a wide array of potential energy sources, is another sign of an underlying destructiveness inside the US President which is disturbing. Has the US ever suffered from such an administrative agenda of apparent national suicide as this one?

The BRICS have promise so long as they are being pulled up from the outside by stronger economies which need BRICS exports. If the world's superpower and the other great markets of the global economy sink themselves via bad government, it will be no use looking to the BRICS for long term economic redemption.

More: Brazil -- Nowhere to go but down?

No Way to Pretend that this Mangy Dog is a Beautiful Princess

More... FinancialArmageddon: Not a sense of recovery wherever you turn

The global economy remains devastated, despite all popular claims to the contrary. And it is not just Greece, Ireland, Spain, and Portugal which are in trouble. The US is beginning to feel the hurt from ludicrous fiscal and monetary policies which date back to the 1970s -- but which have reached particularly destructive levels under the Obama-Reid regime. The global economy still pivots around the US economy. And that is bad news all around.

1) Existing home sales for April were down 0.5% to 5.05 million as compared to 7.2 million at the peak. Inventories of homes for sale increased to a 9.2 months, the highest since December while prices were down 5% from a year earlier.

2) April housing starts dropped 10.2% to 523,000, barely above the recession lows, and below any level prior to 2008. According to the National Association of Home Builders (NAHB) traffic of potential buyers was still extremely low. Keep in mind that this is an organization that usually puts a positive spin on any results.

3) While weekly initial claims for unemployment insurance declined to 409,000 from the prior week, the number has now been over 400,000 for six straight weeks after a period of coming in below that level.

4) The Philadelphia Fed Index for May fell sharply to 3.9, losing 39.5 points in the last two months. This is also well below the 1st quarter average of 32.9. Both new and unfilled orders dropped significantly while inventories also declined, indicating that the inventory buildup that helped support the recovery may be moving back in line with demand, which has been growing less than production.

5) Consistent with the above, April industrial production was flat. It is likely that production, which had consistently been running ahead of demand, is being reduced as inventories that were depleted during the recession have now caught up. This also may explain the higher level of initial claims.

6) The Empire State Manufacturing Survey was also down 9.8 points to 11.9, the lowest level since December. This index therefore confirms the Philly index and suggests similar lower results from the ISM manufacturing index.

7) The April index of leading indicators declined 0.3%. While one month does not make a trend it was the first monthly drop since last June, and fits in with what other indicators seem to be telling us.

8) Similarly, the ECRI Weekly leading indictor has been down for three of the last five weeks and has been about flat since mid-December after rising steadily from the recession lows. This is indicative of at least a pause in coming economic growth, and perhaps something worse.

9) April core retail sales increased only 0.2%, and were probably flat to slightly down when adjusted for inflation. Higher income from reduced social security withholding was more than offset by higher gasoline prices, tepid wage increases, high unemployment, lower home prices and recessionary levels of consumer confidence. And this is happening even before the end of QE2, which has been keeping the economy afloat since November.

10) The April Small Business Survey, after rising weakly from recession lows, has now dropped 3.1 points in the last two months. Even at its most recent high it was below any level in its history prior to 2008. Key segments that declined were plans to increase employment and capital expenditures. In addition the number expecting sales to rise also dropped.

11) In addition to the domestic concerns cited above, the global picture is also not looking too rosy. ECRI's long leading indicator of global industrial growth peaked last August at 0.7 and stood at 0.1 in March. ECRI managing director Lakshman Achuthan stated "There's a downturn in global industrial growth in clear sight". EU production fell in March and retail sales have been flat for six months. In the UK there's been no GDP growth for six months. Japanese GDP dropped 3.7% annualized in the 1st quarter and 3.0% in the 4th. Note that the earthquake occurred on March 11th, toward the end of the quarter, so cannot be fully blamed for the 1st quarter and not at all for the 4th. Industrial output in all of the BRIC nations seems to be slowing, and current monetary and fiscal policies suggest more to come.

All in all it seems to us that the odds are high that a domestic and global economic slowdown is already in place. In the U.S. the slowdown is happening with only six weeks to go before the end of QE2, a program that has been a major prop for even the tepid recovery we've undergone so far. For the stock market nothing seems to matter until, suddenly, it does. _ComstockFunds

Did you imagine that China is ready to take over as the global economy's driving force? Better think again. More here.

via EconomyWatch
Drowning in Debt: Why the economy still cannot seem to recover.

Reading the consequences of debt: The hidden taxes of debts, deficits, and a deflationary : inflationary chaos -- along with dysfunctional government regulations, incentives, corruption, and laws -- combine to crush any nascent recovery in its cradle.

But the disaster is compounded by the effect of demographics: If human capital is not growing and improving, any realistic hope of economic growth and development is delusional.

Japan is the canary in the coal mine, the early warning signal for the rest of the world, on the dangers of debt and demography. The PIIGS of Europe are following closely behind. Russia would be a global economic basket case except for Siberian wealth -- and how much longer can the bear hold on to Siberia in the face of shrinking demographics and evaporating human capital?

Will the people of the west ever wake up to what they are doing -- and allowing to be done -- to themselves? If not, what are the alternatives? Who is John Galt?

Russians Not Taking Financial Crisis Well

...the economies of about 700 Russian cities are dependent on a single major local industry or factory. If those factories shut down, the majority of the people in those cities will have no way to make a living. Kremlin leaders do not have a clear strategy for coping with this looming disaster. _MoscowTimes

The corrupt, inept, and oligarchic nature of Russian leadership has never been so plain as in the current world financial deflation and deleveraging. With oil prices low and foreign investment currently shut down, the Russian government's ability to placate its citizens is being strained.

As the crisis is spilling over into the real economy, the people's tolerance level for government policies is reaching its breaking point. Even before the crisis, the people's anger over runaway inflation and their eroding purchasing power had been building up over the past few years. In addition, corruption has gotten markedly worse as the level of monopolization in the economy and bureaucratization of government has increased. All of this is pushing people's discontent to the surface.

...hundreds of banks across the country might go bankrupt in January and February. That could lead to protests by depositors who are unable to retrieve their money, despite the limited government guarantees on bank deposits. In addition, people are upset with the government's decision to increase utility prices for all homeowners in 2009. This might have been tolerable during a time of steady economic growth and rising standards of living, but it is unacceptable in the midst of a crisis. _MoscowTimes

Coming so quickly after the past summer's general euphoria at rising Russian incomes due to high energy prices and Russia's military triumph over tiny Georgia, this economic downturn and a general governmental ineptness to deal with it, has led to widespread discontent, protests, and an upsurge in anti-government feeling.

China is also having significant economic problems due to severely reduced demand for exports, and a shutting down of a large portion of foreign investment. With hundreds of millions of citizens below the poverty level, China's CCP led government is in almost as precarious a position as Tsar Putin's government.

Neither China nor Russia has achieved the type of economy that would largely sustain itself in the face of rising protectionist sentiment and action around the world. Everyone is waiting to see if the US narcissist-elect will set the final protectionist chain reaction in motion. The BRIC nations (Brazil, Russia, India, China) in particular are hoping for a miraculous change of heart from Obama.

Crisis in China's Manufacturing Deepens

China’s economy, which really needs 6%-7% growth to sustain its “built for growth” economy, is watching growth decline quickly...JPMorgan recently stated it expects China’s GDP growth could drop to a 4% annualized rate in the fourth quarter of this year. That’s not just going to keep China’s economy growing to its still adolescent economy which requires a lot of capital spending to grow. _SeekingAlpha

When the US catches cold, the world gets pneumonia. That is particularly true for the BRIC emerging nations who are particularly dependent upon exports for their internal prosperity. We discussed some of Russia's economic problems yesterday. Russia's partner in crime, China, is also having some economic problems due to the slowdown of the US and European economies. China is dependent upon exports to maintain its manufacturing boom, and everything that comes along with it.

About 39% of China’s GDP is capital spending. That means a huge portion of China’s economy is building new factories, steel mills, mines, etc.

With the economy slowing down, you really can’t justify building a new factory while 10 others are getting shut down. Economies just don’t work like that.

That’s the bigger risk here. China’s economy is built perfectly for booms, but it will face a lot of trouble as more and more factories get shut down. Exports are a big part of the economy, but building the factories necessary to produce more and the housing needed to house the workers is an even bigger part of the economy.

The implications of further meltdown in China will be felt in many sectors in the rest of the world, namely oil and other commodities used to build infrastructure and production capital.

So far the oil markets have been propped up by hopes of a fairly quick recovery in emerging markets. Copper, cement, iron ore, and plenty of other commodities have experienced fairly significant price drops as well, but there’s a very real risk they could go down even further. _SeekingAlpha

As the incoming Obama administration prepares to institute its anti-market economic policies, and its anti-US Constitution social policies, the near and intermediate-term prognosis for the US economy is mixed.

The natural course of the US economy is to recover from a cyclical downturn, as capital seeks out and finds more productive uses--and as new technologies and industries open up due to invention and innovation. But the Obama/Pelosi policies promise to raise taxes, multiply regulations, encourage radical unionisation of non-union industries, create a free-fire zone for trial lawyers, and stifle innovation and to choke off the US' energy supply, raising the costs of doing business all around.

If Obama/Pelosi fulfill all of their promises to their wealthy and powerful backers, the US itself will catch pneumonia, and a persistent "national malaise" to boot. It is difficult to overstate the debilitating effects of such a depressed US economy on the rest of the world--particularly export-dependent nations such as China.

When Nation-States Fail

We are in the middle of the failure and bailout of financial institutions in the US, Europe and China. There are the contemplated bailouts of the auto industry, of the State of California, and no doubt more states and industries. The country of Iceland itself is in the market for a bailout, and Iceland is not alone. What will it mean for nation-states to fail, and who will bail them out?

What we are seeing is the slow motion failure of nation-states from the third world, to the BRIC nations, and even in the developed world as in Iceland, England and France.

Entrenched corruption -- think government employees unused to financial deprivation not getting paid except by graft. An inability to govern territory and a general loss of legitimacy. A global swiss cheese effect from Mexico to Pakistan, where thousands of small holes in the global security system appear with rapidity.

A rapid increase in the number and power of criminal guerilla groups that will challenge nation-states. These groups will flourish within the ungoverned spaces that emerge, particularly in urban areas and even within the U.S. The combination of access to global markets, rapidly improving technology, and new methods of warfare mean that these groups will be ascendant militarily until successful strategies emerge to counter them.

Worst of all, these criminal guerrilla groups (collectively known as global guerrillas) will be able to generate wealth via transnational criminal networks and control political services to local populations (through both disruption and parasitically draining national infrastructures), gaining legitimacy that nation-states will not be able to provide. This means that these groups will not only emerge quickly, they will grow stronger over time. _Wired

These are warnings that Robert D. Kaplan and others have been sounding for decades. The death of the nation state from an inner corruption eating away at its heart and nerve centers. The emergence of competing organisations of a military and para-military nature capable of creating "no-go" zones where the local and national law enforcement agencies do not dare to go.

Where have we heard this before? Oh yes, Iraq, Afghanistan, Colombia ... But where US assistance helped Iraq and Colombia shrink their "no-go" zones significantly and increase areas of civil order, many nations of Europe and parts of North America themselves are becoming quasi no-go zones. The emergence and growth of religious terror cells in Europe, Canada, and Virginia, along with criminal gangs for illegal drug smuggling and distribution, spell insurrection for the first world.

As US cities perpetuate "Sanctuary Zones" for the importation and unchecked proliferation of criminal gangs, the incoming administration of the narcissist-elect promises to close the off-shore prison for terrorists in order to bring them to US soil for civil trials. The chaotic US Mexican border should be well defensed and guarded, but instead the Border Patrol is defanged and demoralised, and the construction of even a minimal border wall is stalled.

Parts of the US have had higher murder rates than Iraq virtually throughout the worst of the Baath-Sunni-Sadrist terrorism and insurrection. Under a more permissive and corruption/illegal immigration-friendly US regime, expect things to become much worse. California is asking for a federal bail-out, naturally. Michigan and New York may be next in line.

Unfortunately, the type of bailout that the current inept Congress and the narcissist-elect have in mind, will only make things steadily worse. Financial failure breeds failure of cohesiveness in a multi-ethnic nation state. Things fall apart and the central powers cannot hold, after disruptive forces reach a certain point.

Do not fail to make contingency plans.

When BRICS Crumble

Brazil, Russia, India, and China constitute the BRIC group of emerging nations. The BRIC nations have been seen by international investors as a safe investment haven during a time of economic downturn in most of the developed world. Unfortunately, high oil costs are beginning to take a toll in some BRIC countries.

...the BRIC economies are under stress of seeing their economies crumble under the threat of runaway inflation. India's troubles are perhaps just an early-warning sign. Inflation in China is running close to 8% in spite of higher interest rate.

Inflation in Russia just topped 15%. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.

Stock investors, seeing this threat on the horizon, are now pulling money out of the BRIC markets. As an Indian government official said recently, "Until inflation slows, this crisis is only going to widen." __SeekingAlpha

The international investment scene is a showcase for human hysterical tendencies, and the mass psychoses of groupthink. The current speculative circus revolving around commodities prices should suggest several ways that a more level-headed investor could take advantage of the dominant market hysteria--a hysteria that is further inflamed by mass media, and propped up by anti-energy policies within the US government.

These are merely opportunities disguised as problems. When skiing down a wooded hillside at high speeds, look at the spaces between the trees, not at the trees themselves.

Global Inflation from Oil Hikes: No Nations Immune

Optimistic analysts had been hoping that economic booms in the BRIC nations--Brazil, Russia, India, China--would supply needed global economic growth that the US and Europe have failed to supply. But price pressures from inflated oil prices are putting the BRICs under a lot of inflationary strain. The emerging economies simply do not have the firepower to substitute for slow US economic growth.

"They (BRIC economies) are running very large combined trade surpluses in the order of 500 billion dollars... so if there's weakness in the advanced economies, you are going to see weakness in the emerging markets," McCormack said.

"The trade flows are going the other way, so the conclusion that we reached is that strong growth in the emerging markets is not really going to help offset weakness in the advanced economies."

Both India and China still account for a relatively small portion of global imports which means their economies' influence on international growth is limited, the US ratings agency said.

India only accounts for two percent of the world's gross domestic product, said McCormack.

"So in some sense, it doesn't matter how fast India grows and it's not a very open economy," he added.

"It's not really going to contribute to stronger growth in other markets. It doesn't import that much. It's just too small." __AFP

Obvious, no? But financial analysts and journalists can easily overlook the obvious in their enthusiasm for emerging markets. It gets worse.

As oil prices rise, Russia's inflation rate is approaching the high teens. China and India have been subsidising fuel prices for consumers, driving demand and putting an ever greater strain on the government infrastructure as oil prices mount. Inflation from higher oil prices is the greatest threat to world economies.

The Shanghai stock exchange has lost almost 35% of its value this year, representing a huge loss to Chinese savings. Far from providing a life vest to a struggling global economy, China itself--and much of Asia--is flirting with significant regional slowdowns. China's remarkable boom--like India's--has been built upon outside investment and exports. As the more developed economies slow down with higher fuel costs, China's economic engine itself is being strained for fuel.

Oil prices are in the driver's seat for now. Until the US Congress wakes out of its deep coma, and takes the handcuffs off of energy providers in the US, oil prices will be driving the global economy in an increasingly erratic manner.

The BRIC economies are too small and too closed, to substitute for slowdowns in the US and Europe. And they are not immune to high oil prices--far from it.