BUD BREWER
One Man's Opinion
The New Economic Superpowers
December 24, 2009: I know the Obamacare battle has probably been talked to death in most crowds but this past week’s legislative process is probably the worst exhibit of what has befallen the American People as any in modern times. When he was campaigning, Obama said he was going to open up the debate for legislation by having full disclosure on C-span and the Internet so everyone could see and listen to different points of view. But now that he has taken office, his strategy for open government has been trashed. Yet we still have the partisan majority creating law in ways some call horse trading while others call it bribery. In either case it smells and makes me want to go back to just not knowing how bad and less than honest these people really are. I must add that the record of the Republicans in recent years was not much better. Such a disgusting exercise as that we have just seen by the United States Congress makes people of integrity wonder whether this country can endure. If this isn’t enough, when you look at the world through economic bifocals, I am amazed how much our country has slipped in terms of its place of influence in the World.
Modern Beijing
China, India and Brazil are becoming such dynamic economies in the global markets that it will be a mistake by money managers to give only token consideration for investing more in them. While many of us have been enthusiastic about opportunities in these countries, investing more than a relatively small amount of capital carried perceived risks that could have seriously damaged a portfolio if they became manifest. The situation is changing now though and I think many more investors or their managers will ratchet up the percentages of their capital that they invest in these dynamic economies. To be a major investor in China, India and Brazil, the investor must have a significant understanding of the strengths and weaknesses of these countries. That means some professional advice or counsel by people who are associated with entities that have serious presence in those countries and a meaningful understanding of their politics and socio-economic conditions. Don’t be fooled by the images we see in western media of masses of people struggling to survive in these highly populated countries. While it is true that only 25-30% of the populations are well educated or enjoy comparable purchasing power adjusted life styles, these minorities are growing rapidly and in absolute terms represent more people than the United States, Japan and Europe combined. It is likely that within the next fifteen years, China will far surpass Japan’s gross domestic product and will begin to threaten the United States as the World’s largest economy. By 2025, China’s Gross Domestic Product should be approximately $12-15 Trillion (currently $4.5 Trillion). If the U.S. is lucky, its GDP could grow to $14-15 Trillion by that same time. The difference will be in the make up of that output. Faced with mammoth debt, confiscatory tax policies, some Federal Reserve manipulation of interest rates creating cross curents for deflation or potential price inflation, higher than normal unemployment and rising government mandates upon individual spending, the American consumer is not likely to be buying too much over their level of purchases in 2009 for some time. The Governments of most states will have faced enormous fiscal problems and many will have experienced some form of default.
While a majority of Americans will struggle through this period and be able to maintain most if not all of their present life style, many, due to their extended debt, little or no reserve savings, etc., will not be able to sustain theirs and will fall into that group supported by the our government welfare and unemployment benefit programs. Many traditiional American businesses will be turning to the government to help with their deteriorating financial situations. Some government help will be provided allegedly to save jobs in either what they call a bailout or by corporate reorganizations in which creditors and the government become owners of the enterprise.
Many in the finance industry (Wall Street) already entrenched in the Global markets administering their own capital or that of individuals, institutions and sovereign funds, etc., will begin accelerating the process of making a major adjustment to their strategy to become less dependent upon U.S. investment and more committed to the markets created by and serving the 2.5 Trillion people in China, India and Brazil. Their economies are growing at 8-10% per annum, they have huge trade surpluses, little or no consumer debt and more savings than they know what to do with. This means that their relatively more conservative consumer demand for many products and services, that we have always thought indigenous to the Western consumer life style, will be developing in these countries. While the United States will be mired in debt and struggling to produce enough GDP to service the interest and principal payments on it along with the requirement to pay for the explosion in entitlements, China, India, and Brazil citizens will shift some of their trade surplus and savings to increasing their standards of living. For example, did you know that this last year, the Chinese purchased more automobiles made in China than Americans did here in the U.S.A.? Did you ever believe that would happen in our lifetime? During this past year when the U.S. economy contracted 2.5% and Japan’s shrank 5.2%, China’s economy grew 8%, India’s 6% and Brazil ended up even or slightly in the black. China has emerged as the economic engine driving the global economy. Its economy is set to grow another 9-10% in 2010. In October, their industrial production rose 16%, fixed investment 33%, car sales 77% and consumer spending 16%. China has a small fiscal deficit and a large trade surplus. It has $2.3 Trillion of foreign reserves, a number that has grown $60 Billion per month during the 2008-09 crises. These reserves have given China the flexibility to stimulate its domestic economy without incurring mammoth debt like our Democrat friends in Washington.
The stories are much the same in India and Brazil. All the while Japan and the United States are competing to become the world’s largest debtor nation. Total U.S. Debt to Gross Domestic Product has risen to 358%, on a par with Japan’s bloated levels. This 350% level for both the U.S. and Japan is far above the 100% level for China, India and Brazil on average. The federal and state government’s fiscal positions are in a crisis. The federal deficit in the U.S. this year will be 11-12%, the worst since World War II. The Federal debt has expanded from $2 Trillion in 2000 to $12 Trillion this year. The American consumer debt has risen to 100% of GDP and the saving rate is still barely zero. Only the corporate sector of the U.S. economy is healthy, with high levels of cash and low leverage. A recent study done by Goldman Sachs predicts that China will eclipse the United States as the world’s biggest economy sometime in the 2020-2030 timeframe.
What does all of this mean relative to what we do with our investment capital? To me and I believe to many serious investors around the world, it means that we ignore these trends at our peril. We must reallocate more of our investment capital to the faster growing economies outlined above. We should maintain more modest investment in domestic companies and then only in those that have global presence and distibutive strength. Our investment in service companies should be conditioned upon their ability to exploit the opportunities from the expanding economies of China India and Brazil. My working number for investors with time horizons of 10-15 years is 50-75% of the equity segment and perhaps the same ratio of fixed investment. The next few years of such a strong shift will likely be volatile as transaction demand and supply temporarily distort fair market value but by 2020 such a shift in weighting should be and have been experiencing stable superior growth.
There likely will follow a shift in the political power and economic influence of the United States and that change will be a weakening one leading to negative forces upon stock and bond valuations. Don’t misjudge the pace of these changes. The U.S. economy will not fall off a cliff and the expanding role of government will mask the longer term consequences and rate of change in relative prices of business assets vis a vis the rest of the world, but the change will be real. Today there is little or no premium one has to pay to play so to speak. Tomorrow there will be! The WesternWorld will continue to be an important even if diminishing segment of Global economic activity, but we will be experiencing a rising pace in the rate of decline of our relative economic and political influence in the world.
One Man’s Opinion– Bud Brewer
Pop,
This is a very interesting article. I retweeted this to all 14,600 followers in Twitter as well as forwarded to my network. I am hoping this will start a following of readers who find your posts informative and interesting.
Thanks Gary. There should be a lot of interesting comparisons developing over the next few years. As is always the case, if you have money to invest, you can take advantage of opportunities. Those who are able to live within their means and produce a flow of excess cash savings, will be able to take advantage of the extraordinary opportunities that this global shift presents. I only hope our grandchildren will embrace the concept of saving and investing as the first call upon income.
One comment I have on “understanding” the sphere of influence: You do realize that these are corrupt governments. I don’t know if the investments are limited to the stock exchange, but investing in these businesses/countries can be dangerous unless they are researched very carefully.
Susan
Great site, exactly what I was looking for, I can’t get your RSS feed to work right in google chrome though, is it on my end?
Probably not. I’ll ask my Administrator
Bud Brewer