15 November 2012

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.

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