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The Daily Reckoning | Monday, March 15, 2010 The Undeniable Wealth Potential of Emerging Markets Why investing in the US over the past decade may have been all for "naught" Joel Bowman A cool breeze blew in over our little island late this afternoon. The temperature is forecast to drop from a high of 90 degrees today to only 60 tomorrow. How quickly things can change... But we're here to talk markets... If you took Friday off, you didn't miss much. The Dow nudged higher by a fraction of a percent. The NASDAQ and the S&P 500 remained, for all intents and purposes, unchanged. Gold slipped a bit over the past few days. After a failed run at $1,120 per ounce on Friday, ol' yella fell back to around $1,100. This morning it trades a few bucks higher. Oil holds steady at $80 and change per barrel. Here in Asia, indexes mostly declined overnight. Hong Kong's Hang Seng ended the session half a percent down. Measures in China and Taiwan fell around 1.5%. Japan's Nikkei 225 was flat. All in all, it has been a comparatively underwhelming few days for traders. Investors, on the other hand, have plenty to think about. Those looking to protect and grow their wealth over the long haul have to factor in longer term trends, the kind that remain impervious to cool afternoon breezes. One such trend is the gradual ceding of global economic control by the world's last remaining superpower. Depending on whom you ask, this trend probably began sometime between the mid nineties and the early "naughts" - a term some commentators have taken to calling the first decade of the third millennium. The word "naughts" is actually not a bad name for the period. Taken literally, it means nothingness, or nonexistence. Certainly, from a stock market perspective, the decade has been a veritable cipher...a zero. The Dow Jones Industrial Average, for example, began the decade a few points shy of 11,500, almost a thousand points above where it sits today. After factoring in inflation and, for managed accounts, fees, commissions and myriad other charges, most investors in US stocks would be happy to have achieved a zero return on their money over the past ten years. Meanwhile, many of the world's emerging markets have provided investors with some very handsome, money multiplying years. India's Sensex 30 Index, for instance, more than tripled over the past decade. From around 5,000 back on January 1, 2000, the measure of India's 30 bluest chip companies now hovers just above 17,000. Brazil's Bovespa has similarly outpaced the more mature US markets. Kicking off the new millennium a shade above 16,000 points, South America's largest index is today bumping up against the 70,000-point mark. South Korea's Kospi has more than doubled during the same time. Argentina's Merval bolted from around 500 points to nearly 2,500 today...the list goes on... Although the intraday volatility is typically higher in emerging markets, it is clear that these developing countries have more than just a gentle breeze at their backs. Gone are the days, therefore, when an investor could afford to simply dismiss out of hand the wealth generating potential of emerging markets. The 50-year old investor who chose to allocate even a small portion of his capital to any of the above-mentioned markets at the beginning of the decade is undoubtedly in a superior position to one who stuck to the US majors only. Of course, physical capital is not the only factor to consider when assessing the relative strength or weakness of a nation's overall international standing. One must also reckon with currency fluctuations, political stability and the prospect of future economic growth, among a host of other contemplations. And, perhaps most important of all, one must be mindful of the in- and out-flow of a nation's most valuable asset: it's human capital. Over in the US of A, the intellectual capital is certainly flowing. Unfortunately, though, it appears to be flowing in the wrong direction... The Daily Reckoning Presents The First American Brain Drain AddisonWiggin Baris Guzel is the kind of fellow who used to find his future in America. Not anymore. Guzel is a 25-year-old student from Turkey working on his master's degree in engineering management at Duke University. He and four friends plan to launch a company offering a free online tool that would allow website operators to poll their readers. It might work, it might not. That's what American entrepreneurship is all about. Or it used to be. Unfortunately for America, Guzel is thinking about opening his venture in Germany. "It is hard for foreigners to get a job these days [in the US]," he explains to Business Week. "In Germany, it is easy to obtain a working visa." Guzel's story says a lot about America's future - and how you need to invest during the coming decade. It's a brutal truth: America is losing some of its most promising entrepreneurial talent - the legions of young foreigners who come to study at US universities. In recent years, foreign students snagged 60 percent of engineering doctorates in the United States. If you widen the pool to doctorates in engineering, mathematics, computer science, physics and economics, foreigners still accounted for 50 percent. Immigrants were CEOs or lead technologists at over 50 percent of Silicon Valley startups in the last decade. Immigrants co-founded Google, eBay, Intel, and Yahoo, among others. Time was when these students exited the academy, they stayed stateside. Ninety-two percent of Chinese Ph.D.s in science and engineering remained in the United States for at least five years after their studies - and 85 percent of Indians. No more. One of Guzel's professors, Vivek Wadhwa, goes so far as to say "the United States may be experiencing the first brain drain in its history." In 2009, Wadhwa was among four researchers from Duke, Harvard, and Berkeley who compiled a survey of more than 1,200 foreign-born students for the Kauffman Foundation. The number of Chinese who plan to stay is now just 54 percent, while the number of Indians who expect to remain is 58 percent. What's more, only seven percent of Chinese students surveyed and 25 percent of Indian students believed the American economy's best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believed their home country's best days still lay ahead. No doubt that's linked to their perceived job prospects. And that perception is colored by the successes their countrymen already achieved after returning home. Wadhwa and his colleagues previously surveyed foreign students who'd already returned to their home countries. "Only 10 percent of the Indian returnees held senior management positions in the United States," he says, "but 44 percent found jobs at this level in India. Chinese returnees went from 9 percent in senior management in the United States to 36 percent in China. Opportunities for professional advancement were considered to be better at home than in the United States by 61 percent of Indians and 70 percent of Chinese." P.J. Lavakare's experience backs up those numbers. He's an Indian "pioneer" of this migration pattern. He earned a Ph.D. from the University of Rochester on a Fulbright scholarship in 1963 and returned home to shepherd generations of young Indians through the same process. Nowadays, he says, "attractive job offers in the Indian corporate sector have given a new dimension to the mobility of Indian scholars who are now considering returning to India to take up challenging and lucrative assignments in the growing multinational sector in India." That is, instead of taking a low-paying job in an Indian university, they can take a relatively high-paying one at a multinational corporation. Follow The Capital, Follow The Brains Most Americans would have a hard time wrapping their minds around this domestic "brain drain." The US has always been the land of opportunity... the beacon of hope... for the rest of the world. Or so we've grown up telling ourselves. After all, "brain drains" are what used to happen to other countries - Warsaw Pact fossils living under Moscow's thumb, or the soft-socialist nations of Western Europe. But if the kind of people who helped build Google, Intel, and eBay now choose to do the same in the countries where they came from, then it pays to follow the money - and the brains. In other words, if you haven't yet expanded your investment horizons beyond US-based companies, there's no better time than now to start - because the Googles of tomorrow will likely be found outside American shores. One very simple way to get started is to buy the India Fund (NYSE:IFN). It's a closed-end mutual fund that trades just like a US stock. It gives you exposure to every facet of India's economy, which is forecast by the World Bank to grow faster than anywhere else in 2010 - including China. You get a cross-section of the Indian economy - energy, finance, telecom - but this is an actively-managed fund that seeks to outperform the Indian market as a whole. If you'd put money in The India Fund in the autumn of 2008 - as world markets were in full panic mode - you'd have been up 31% a year later. We anticipate much better is still to come. You won't want to trade in and out of this fund. Just tuck it away in your portfolio and let it ride for a few years. Addison Wiggin for The Daily Reckoning Joel's Note: You've probably heard by now that Addison has just begun beta-testing his brand new research service, tentatively titled Addison Wiggin's Apogee Advisory. Well, now he needs your help. During the testing phase of this new project, Addison will be looking for feedback from astute readers like you. He's even prepared to waive the initial fee for the first three months of the service in exchange for your considered opinion. But, if you want in on the ground floor, you have to act quickly. The first beta is out now. So, if you're interested in being a part of Addison's new project, click here. Bill Bonner Economists to Miss the Next Financial Crisis Bill Bonner Beware the Ides of March...and the rest of the year too! This is the day Caesar was assassinated. What's it to us? Well, it just reminds us that things go wrong. Even when you're on top of the world. There are always countercurrents...undercurrents, beneath the surface, where you don't see them...plots...conspiracies...and just bad luck. On the surface, the US economy is recovering. Well, not even. It is stabilizing. The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81. The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January...which boosted the figures for February. Had they not done so, the figures for February would have been negative! Still, consumers are not as lifeless as they have been...and on the surface, this is good news. And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over...and that we're in a recovery. The lumpen consumer probably thinks he's going to find a job soon...and that his house is going up in price. But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a "liquidity crisis." In fact, they were signs of a debt crisis. The private sector had far too much debt. Economists who never expected trouble, reacted to it in a predictably moronic way - they rushed to the rescue with more debt. Now, they think they've triumphed... They've prevented another Great Depression. They've saved the world! We're written so much about that; you surely don't want to read any more on that subject. But here's the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous. Instead of reducing the world economy's reliance on debt, they increased it! On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far. Alas...net, the world's debt is still increasing - by a huge margin. Over the next 3 years, the biggest 20 economies in the world - the G20 - are expected to slip over the 100% mark, with more debt than GDP. Now, let's do a little math. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%...that means you're spending 20% of tax receipts on debt service. But suppose inflation rises...and interest rates go back up to where they were in the late '70s. Back then, the feds had to pay 15% interest to borrow money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues - just for the interest. Obviously, that's not gone to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely... Of course, this doesn't bother the feds. That story is still beneath the surface... It's a crisis that hasn't happened yet. They couldn't see the crisis in the public sector coming in '07. They can't see the next one coming either. Economists can't tell a government job from a private sector job...and can't tell $1 of government spending from a dollar spent by the private sector...and can't tell a dollar's worth of GDP from a dollar's worth of real prosperity... ..which means, they can't tell the difference between what's happening on the surface to what's happening underneath. In a sense, this is just another manifestation of the same "battle" we wrote about years ago. On one side are the feds. On the other is Mr. Market. The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand. On the surface, the feds are winning. At least, that's the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds' way. But deeper down...the debt is still there...and it is growing bigger. And Mr. Market sharpens his dagger. Until tomorrow, Bill Bonner for The Daily Reckoning