If these are the signs of recovery, it is a very strange recovery indeed. 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.
The Daily Reckoning | Thursday, February 25, 2010 Discovering Recovery In Wall Street and Washington The two places you'd expect to find it, and a almost nowhere else in sight 
Eric Fry 
Chris Mayer 
Thursday 25 February 2010
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!
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...
“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.
Emerging Markets Are Still a Buy
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.)
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 month to try my service (which usually retails for $995 per year) and first crack at these four natural gas plays...all for one dollar. Here’s a link in case you’re interested.
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