 | | The Daily Reckoning | Thursday, October 28, 2010 |
- One emerging market opportunity almost nobody's talking about,
- The death of currencies - like politicians - all but certain in the end,
- Plus, Bill Bonner on Big Ben's QEII extravaganza, terrorist hotline tips, longer, unaffordable lives and much more...
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Way back in 1968, an American B-52 crashed in northwest Greenland...
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|  | | | Delusions of Immortality | | Why Fiat Monies Always Suffer the Same Eventual Fate | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
The nation is in "official" mourning for three days. We didn't know grief could be officially mandated...but there you have it.
Still, flags fly at half-mast in front of empty government buildings...even as the rest of the country resumes work as usual. In other words, the sun comes up, the world continues to turn, and the traffic is as bad as ever.
Sentimental photos of Néstor Kirchner, the ironhanded Peronist and First Gentleman who died of a heart attack yesterday morning, dominate today's papers. Comrades from around the Americas, including dear friend and Twitter buddy, Hugo Chavez, Bolivian leader Evo Morales, Ecuador's Rafael Correa and a laundry list of others, are descending on the capital city to participate in the ex-and-aspiring president's wake. In other words, it's a tidal wave of corrupt politicians and crackpot dictators...just what every country wishes for in time for the holiday season.
It's too early to tell what Néstor's passing will mean for the country as a whole, but international markets staged a bit of a dead-president- bounce yesterday. Argentine bonds rallied in New York as investors welcomed the former president's permanent departure. We'll have to see how long this state of optimism lasts. In the meantime...
Stocks edged lower in the US yesterday, though not decisively. Investors continue to play the waiting game, holding their breath in anticipation of Ben Bernanke's announcement next week. He's expected to launch phase two of the money-printing program, known in polite company as "quantitative easing." Unquestionably, a determined dollar- debasement initiative spells trouble for the greenback. "The dollar," as Puru Saxena wrote in last Friday's reckoning, "is doomed."
But you knew that already. It's what eventually happens to all fiat monies. Assured Puru, "Let there be no doubt, a paper money system usually ends in the reckless destruction of money and it is no coincidence that all hyperinflations in history have occurred in the presence of discretionary paper money regimes."
The immortal value of fiat monies, in other words, is really more of a temporary delusion than historical fact. All currencies, when exposed to the whim of overzealous central bankers, tend to find their home in the ground sooner or later. It's true for people - even politicians - and it's true for the money they "create."
On a decidedly more upbeat long-term trend, we've been monitoring in these pages of late the continued and seemingly irrepressible emergence of the world's emerging markets. Using almost any metric you care to employ, the growth of China, Brazil, India and the rest of the developing world is as impressive as it is encouraging. In stark contrast to the heavily indebted western world, many of these former investment outposts are enjoying a "morning time" of capitalistic initiative and, as such, vastly improved government finances and competitiveness on the world stage.
During the coming four years, for example, the IMF expects BRIC countries alone to produce almost 5 times more GDP growth than G7 countries. This statistic is all the more impressive when one considers that, as recently as the 1990-2000 decade, BRIC nations accounted for less than one third of global GDP growth while G7 countries kicked in over 40%. In four years, the G7's share of that growth is expected to shrink to just 12.8%.
Obviously that's a pretty tough tide to swim against. Unsurprisingly, therefore, an increasing number of savvy individuals are looking to the high-growth, low-debt realms of the emerging markets for investment opportunities. Rob Marstrand, Chief Investment Strategist of Bonner & Partners Family Office, is one such individual.
Before he came to work alongside Bill Bonner, overseeing the investment strategy for theFamily Office, Rob spent 15 years at investment bank UBS, including a stint as Head of Strategy in Asia Pacific. In today's guest essay, Rob lends us some of his unique insights on one market in that region few investors have on their radar. Details below...
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| | The Daily Reckoning Presents | | The "Fifth BRIC" | |  | | Rob Marstrand |
This place isn't on most investors' radars...yet. But that will change soon.
This country:
- Is a member of the 20 wealthiest nations on earth: the G-20
- Is the world's third largest democracy, after India and the US
- Has the world's fourth-largest population of 240 million people
- Has a stock market that has gone up nearly 44% in the past year
- Has doubled its economy in the past five years
The place I'm talking about is Indonesia.
You've heard of the BRIC economies - Brazil, Russia, India and China. These are the "big guns" in the emerging markets world.
Jim O'Neil, a well-known Goldman Sachs analyst came up with the term back in 2001 in a paper titled "The World Needs Better Economic BRICs." O'Neil's point: The BRICs would become the world's four dominant economies by 2050.
Think of Indonesia as the "fifth BRIC." Indonesia is slightly smaller than Mexico. Or about three times the size of Texas. The bulk of the population lives on just five major islands: Sumatra, Java (the location of the capital city Jakarta), Sulawesi, Borneo and New Guinea. But the country's land mass is spread over an archipelago of 17,508 islands, of which about 6,000 are inhabited.
This string of islands is on a strategic location slap bang in the middle of major sea-lanes linking the Indian and Pacific oceans.
With a GDP of $521 billion, its economy is less than half the size of its nearest BRIC cousin. But it's certainly big enough to invest in. It's a well-diversified economy with sizable incomes from agriculture, natural resources and manufacturing. It's also well situated between India and China. This means its exports should grow as these larger neighbors grow.
Indonesia also has a relatively stable government under Susilo Bambang Yudhoyono. And although levels of corruption are still too high for comfort, it is recognized to be less corrupt than BRIC member Russia. In general the trend is for less corruption over time.
According to The Economist, Indonesian GDP will grow by 5.9% next year. That's almost three times the World Bank's 2.4% estimate for the developed economies. And nearly three times the 2.5% forecast for the US (which by the way, looks optimistic).
More important, this growth is being driven by the private sector, not by government spending. In Indonesia, the private sector accounts for roughly 90% GDP.
Also, Indonesia is well isolated from the weak economies of the US and Europe. Only 11% of its exports go to the US. The bulk of the other 89% go to Asian nations. This is another reason to have confidence in the country's future prospects.
There's more good news on the consumer-spending front, too. Over the past five years, the average income has doubled to $2,350 a year. And a report by Deutsche Bank predicts that figure can rise another 50% by the end of next year.
Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia- Pacific region. This has attracted manufacturing activities from China. Employment growth is critical, because half of Indonesia's population is 25 years old or younger.
This means the workforce as a portion of total population will rise over the next 20 years. This should further increase the country's consumption levels and fuel further economic growth.
But before we move on, I want to flag three risks associated with Indonesia.
First, there will be a change of president in 2014. A shift away from the reforming agenda of the current administration would be negative for investments.
Second, if big international investors get spooked by emerging markets, Indonesia could suffer badly. But it's important to remember that any turning away from the emerging markets usually only lasts for a short time.
A good example of investors getting spooked (big time) is the recent financial crisis following the subprime mortgage meltdown. Between February and November 2008, the MSCI Indonesia Index fell 72%, measured in US dollars.
Of course, the crisis had nothing to do with Indonesia. Investors everywhere were simply panicking and selling indiscriminately. But (and this is a big but) the index then came roaring back. It's now up 319% from its lows in November 2008. If you'd bought at the pre-crisis peak and held on, you'd still have made 17% on your investment, measured in US dollars.
Serious investors shouldn't worry too much about this kind of illogical, short-term market volatility. In fact, if this kind of panicked selling happens again, I'd be recommending you invest more into Indonesia (plus a lot of other places).
Third, Indonesia runs along an active fault in the Earth's crust. There are quite regular earthquakes and volcanic activity. From time to time this activity can produce major natural disasters. The most infamous recent example was the 2004 tsunami, when a huge undersea earthquake off the west coast of Sumatra triggered the massive waves that pounded parts of Thailand and other countries in the region.
However, despite the omnipresent risks of investing in Indonesia, the country's stock market has been performing brilliantly. The MSCI Indonesia Index has gained 26% a year over the past 10 years, measured in dollars. This investment performance means that the Indonesian stock market has been one of the strongest in the world over the past decade, considerably outperforming all of the BRICs, as well as the loss-making US stock market.
You would have gained 893% if you'd invested in Indonesia over the last 10 years, measured in dollars. In and of itself, that's a remarkable run...all the more so when compared to the S&P 500's 15% decline over the same period. Investors looking to capture the upside of the emerging market megatrend, therefore, would do well to look toward the "Fifth BRIC."
Regards,
Rob Marstrand
for The Daily Reckoning
P.S. After this great performance, it's unsurprising that the Indonesian stock market is a tad expensive. The historic P/E ratio (using last year's earnings) is just over 20.
That's not insanely expensive, given the country's rampant growth, but it's a little outside my comfort zone. However, I've unearthed an inexpensive alternative to play the Indonesian consumer boom - without actually investing in the Indonesia stock market. Call it a backdoor play on Indonesia.
I alerted members of the Bonner & Partners Family Office, which I edit alongside Bill Bonner, to this opportunity just last week. And, in the coming months and years, I plan to add many more like it to our investment portfolio.
If you would like to learn more about joining the Bonner & Partners Family Office, I encourage you to take a look at this personal invitation from Bill's son, Will Bonner.
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| | | | Bill Bonner | | When Fear Takes Over: The Prospect of Hyperinflation | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
What's the big news? Every headline you read implies the same thing. All eyes are on Ben Bernanke.
"Bernanke expected to announce hundreds of billions in new QE," says one headline.
"Investors counting on support from the Fed," says another.
"Fed easing could push stocks higher," says a third.
The man is supposed to announce a program of quantitative easing. He's supposed to do it next week. And if he announces too little of it, investors are going to sell risky investments - including stocks and commodities. In the meantime, investors are guessing.
Yesterday, the betting went against a big push into QE. Investors figured that maybe they'd over-estimated Ben Bernanke's commitment to chicanery. They worried that the announcement next week might fall short of expectations.
The Dow retreated 43 points yesterday. Gold dropped back $16.
What will it do tomorrow? Who knows? The whole investment world has gone a little crazy. It's all speculation now...speculation on how much new money the Fed will add to the system.
Investors aren't buying in anticipation of higher earnings or looking forward to a healthier economy. They're not padding their retirement nests with great stocks at great prices, or participating in the growth and prosperity of 21st century America by buying equities. Instead, they're gambling that the economy will get worse...and that Bernanke will be forced to go boldly where only fools and morons have gone before....
..that is, on the road to hyperinflation.
Remember. There's inflation. And there's hyperinflation. Normal inflation is caused when people have more money to spend and less to spend it on. They bid up prices.
Hyperinflation is different. It comes not from an increase in demand for things...not from greed, that is...but from FEAR...raw, naked, unadulterated fear that paper money is losing its value.
What touches off hyperinflation? Sometimes the cause is obvious. Central banks print up bills with lots of zeros on them. Everyone knows the currency has become "funny money." Everyone rushes to get rid of it.
Typically, this causes a collapse in the economy...which convinces the central bank to add more zeros!
The US central bank is not adding zeros - not yet. It is just threatening to add more currency. Will this new currency lead to inflation? Probably not much. The money will get into the hands of speculators at the big banks - those that can borrow from the Fed. It won't get into the hands of small businesses and householders. So, most people will not really feel richer; they will not want to borrow. They will not want to spend. Demand will not increase. Prices won't go up appreciably.
But while this new money probably will not create inflation, it could well create hyperinflation. We don't know how it works...not exactly. There are so few examples in history that we have no sure model to show us. But speculators could suddenly lose faith in the US dollar. They could sell it off - in favor of land, stocks, collectibles or gold. Dollar-holders - large, institutional holders - might panic, realizing that their dollars are losing value fast. Householders might follow...desperate to get rid of dollars before the next nightly news report tells them that they have lost another 10% of their value.
All Hell could break loose.
But that is still in the future. Maybe 6 months ahead. Maybe a year ahead.
In the meantime, we are still at the beginning of a Great Correction. We have a long way to go. And we should expect high unemployment, low or negative growth, bankruptcies, bear markets, foreclosures...
The big trend is still biased in favor of generally low consumer and asset prices...maybe even deflating prices. Until Bernanke gets his cash machine running hot...that is...
Then, who knows what will happen?
And more thoughts...
While the world wonders about Ben Bernanke - will he, or won't he - the Great Correction continues...driven by more fundamental trends...trends the Fed chief can't do anything about. The New York Times describes one of them:
FIRST the good news: We're living longer, healthier lives than ever before.
We're already so used to the idea of greater longevity, in fact, that it may seem ho-hum to learn that boys and girls born in 2008 in the United States have life expectancies of 75 and 81, respectively.
Those life spans, however, represent a bonus of about three decades, compared with Americans born in 1900, according to a report last year from the Census Bureau. And, by the way, Spain, Greece and Austria fared even better, proportionally: Life expectancies in those countries doubled over the course of the 20th century.
Now for the bad news: At this rate, we can't afford to live so long.
And by "we," I don't just mean you, me and our often insufficient long- term-care insurance policies. I mean "we the people." I mean the bureaucratic "we."
For the first time in human history, people aged 65 and over are about to outnumber children under 5. In many countries, older people entitled to government-funded pensions, health services and long-term care will soon outnumber the work force whose taxes help finance those benefits. This demographic shift also means that the number of people living with dementia, whose treatment is estimated to cost $604 billion worldwide this year, is expected to more than triple, to 115 million, by 2050, according to a report this year by Alzheimer's Disease International, a group representing 73 Alzheimer's associations around the world.
No other force is as likely to shape the future of national economic health, public finances and national policies, according to a new analysis on global aging from Standard & Poor's, as the "irreversible rate at which the population is growing older.
If the status quo continues, the report projects, the median government debt in the most advanced economies could soar to 329 percent of gross domestic product by 2050. By contrast, Britain's debt represented only 252 percent of GDP in 1946, in the aftermath of World War II, the report said. *** "Report Suspicious Activity. 1-800-XXX-XXXX"
"Terror Tips. Call 1-800-XXX-XXXX"
Hmmm... What to make of it?
The War on Terror has been pushed out of the headlines by the war on the financial crisis. Besides, everyone was beginning to see that the war on terror was a fraud. You're never going to win a war against a tactic. And spending beaucoup money trying to win the hearts and minds of fanatics is a losing proposition.
But the war lives on. We have seen these signs at least 10 times in the last three days. They are up over 1-95 and US495 around Washington. What purpose do they serve? Has anyone ever called?
We would have called ourselves...and asked for a tip. But we were afraid of getting on a suspect list.
It is hard to imagine that we will see anything that looks suspicious. First, because terrorists in the Washington area are rarer than honest Congressmen. Second, because they would hardly drive along in pickup trucks wearing Arab headdresses and carrying 55 gallon drums of gasoline in the back. In other words, we wouldn't see them because they don't exist and if they did exist they would be the last people to make us suspicious.
We conclude that the advertising is merely to keep the lumpen voters hyped up for war...imagining that they are under attack and that they must pay big money for someone to protect them...and accustomed to snitching on their neighbors in the name of national security.
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Fannie, Freddie and the Never-Ending Homing Crisis
We interrupt the normally crisp flow of ideas in these daily reckonings with a parenthetical remark. Looking through the newspapers and magazines this weekend we were offered thousands of “homes” for sale. We thought a home was something you lived in. But the ads offer “new homes” – empty houses that no one has ever lived in. It doesn’t make any sense to us. But we conclude that the word “house” has been withdrawn from the dictionary.
A Few TIPS on Inflation Protection
When Gamblers Drive the Markets | Why Creating Money Won’t Shock the Economy Back to Life
The reason I am laughing is that it sure ain’t a-gonna happen, which I know for a Stone Cold Fact (SCF) because if there WAS something that could be done to stop the catastrophe that is unfolding because of a dirtbag government borrowing and spending itself into bankruptcy, it would have worked some other time in the last 4,500 years of the constant, sickening worldwide parade of corrupt dirtbag governments borrowing and spending themselves into bankruptcy...
Pummeled by the Strong Arm of the Financial Ruin
Bonds, Gold and the Dollar: What They All Portend | What’s the US Gold Stash Game Plan Anyway?
In November’s new issue of The Atlantic, James Picerno poses the question of why, given such lean times, “is $300 billion worth of government treasure simply sitting in vaults?” He’s referring to the US stash of gold reserves. Although there are a number of good reasons for the status, it’s interesting to consider what reasons the federal government is willing to offer publicly.
More Asian Recognition of Out of Control US Money Printing, Skyrocketing Gold Price
New “Virtual World Reserve Currency” in the Works, and it’s not the SDR | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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