The White Paper - Emerging Markets and China

Popular opinion suggests that China is on the verge of replacing the U.S. as the engine of growth for the world’s economy. After all, doesn’t China have such a large population that everyone wants their first car, their second plasma T.V., and their third cell phone. (iPhone, of course.) With India, Brazil, and Russia, charging right behind, it would seem obvious why all the pundits believe that an investment in emerging markets is a play on the future. Who am I to take an opposing position? But I have. So here goes.

I could discuss China’s communist government, but the reality is the Chinese were merchants and capitalists long before the U.S. and Karl Marx showed their faces on this earth. Therefore, it is the capitalistic arena that the discussion must be focused. China’s latest stimulus package was applauded as being directed and efficient. It sparked immediate growth (maybe), in the economy, and a dramatic surge in their stock market. However, on closer examination, the stimulus money had two recipients. The first was businessmen, who started building additional capacity for manufacturing. Unfortunately, weak global demand, and even weaker domestic consumption, has called into question the statement “If you build it, they will buy”…..who will buy? The second recipients of the stimulus, and maybe the largest recipients, were those who used it for investment in the stock market. Much like our banks using our TARP funds, and a majority of other government sources to bolster and manipulate our markets, so too, I believe have the Chinese. Rising Chinese stock and property values are simply creating a bubble that ultimately will hurt their economy when it bursts. This type of artificial growth is exactly what we, in the U.S., have experienced for the last nine years, and are now feeling the consequences. India, Brazil, Russia, and the rest of the emerging markets are basing their futures on the same foundation of sand we did, with more than likely the same results.

The continual printing of money by the U.S. Treasury has created the thinking that hyper-inflation is just around the corner. While I do share that opinion, I believe the corner may be a few blocks down. Short-term, deflation is the biggest problem, and therefore the trade of commodities, including oil, is in my opinion, pre-mature. Emerging markets live and die on the commodity trade, so draw your own conclusion.

Whether it’s the U.S., or an emerging market, real domestic consumption, not artificially induced by printing money, real successful business, not zombies propped up by governments, and real stable currencies, not funny money printed at every politicians whim, is the only true path to growth.

The death knell for emerging markets is sounding in the short-term, and one could be foolish not to heed its sound.

Till next time,

Bill


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