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"The belief that companies in the US, Western Europe or Japan are better managed than in emerging markets is also no longer valid," Everest asserts.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.)

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.

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 Australia

• Emerging Markets in the New World Disorder
• The Century of the Emerging Markets
• Vietnam: The Next Bubble in the Emerging Markets
• Still Opportunity in Emerging Markets – Especially India
• Globalisation Halt

In markets, one of the most watched and ongoing match races is the one
between Emerging (or developing) Markets and Developed Markets. The
former include China, India, Brazil and others. The latter include the
US, the EU and Japan. Which one do we bet on and when?

It's a particularly good question now, as we pick through the
smoldering ashes of the 2008 bust. Emerging markets have had a hot 10-
year run, even if you include the crackup in 2008. In fact, even if you
had invested in the MSCI Emerging Markets ETF (NYSE:EEM) on Jan. 1,
2008, you would be sitting on a profit today. By contrast, the S&P 500
Index has delivered a double-digit loss over the same timeframe.

The emerging markets have snapped back surprisingly quickly. As
Jonathan Anderson, a UBS strategist put it, "Not even the worst
economic crisis in the postwar era has been able to derail [them]." In
financial markets, ideas, like thoroughbreds, run hot and cold. Past
performance doesn't necessarily decide the issue any more than it does
in horse racing. But it turns out there is a pretty reliable way to
handicap the race between Emerging and Developed Markets.

The "handicapper" in this case is the aforementioned Mr. Anderson, who
wrote about his findings in the Far Eastern Economic Review. His title,
"Emerging Markets Poised to Perform," hints at his conclusion.

It all comes down to those old financial constructs called balance
sheets. In essence, a balance sheet shows you what you own versus what
you owe. These are snapshots in time, a measure of financial health,
like an EKG of one's heart rate. You can often spot trouble here before
it becomes fatal.

In my investment services, I always seek out companies with strong
balance sheets - the sorts of companies that own much, but owe little.
Enterprises like theses have the ability to withstand adversity better
than those with weak balance sheets. A strong balance sheet also means
that a company can fund its growth independently and more securely,
without having to rely on fickle lenders.

As investing star, Martin Whitman, wrote in his most recent shareholder
letter: "Don't invest in the common stocks of companies which need
relatively continual access to capital markets, especially credit
markets... Even the strongest, best-quality issuers can be brought
down, or almost brought down, if they continually have to refinance."
Unfortunately, many investors learned this lesson the hard way during
last year's severe credit crisis.

As it turns out, balance sheet strength is also very important for
entire nations. But that's hardly a surprise. Countries that owe a lot
of money tend not to grow as much or as reliably as those with healthy
balance sheets. Anderson created a "stress index" to measure the
financial health of entire nations. A country with high debt levels and
deficits earns a high stress index score. He then plotted this index
(inverted) against a rolling average of GDP growth, a rough measure of
economic growth.

Guess what? There's a close connection between the two.

So one way to explain the growth of emerging markets is to consider the
strength of their balance sheets. When they have healthy balance
sheets, they grow faster than when they have weak balance sheets.

You can see that the last time the emerging markets had a long stretch
in the sun was in the 1960s and 1970s. Emerging markets grew 5% or
better. As Anderson notes, not a single emerging market - not Africa,
not even the Soviet Bloc - failed to post 5% annual growth during this
time. And you'll also note that the balance sheets were healthy.

As a result, emerging markets sailed through the first global oil shock
in 1973-75 without much trouble. The developed world, by contrast,
suffered the pain of a deep recession. Investors who stuck with their
emerging market stocks throughout this period reaped big rewards.

According to Anderson, "Between 1965-1980 the dollar-adjusted return on
nascent equity markets in Mexico, Hong Kong, Taiwan, Brazil, South
Africa and other lower-income nations ran into the hundreds of percent
- while indexes in the US and Europe were essentially flat over the
same 15-year period."

Of course, as I say, these things run hot and cold. The emerging
markets "imploded" after the 1980-82 recession. A dozen different
countries reported inflation rates north of 100%. As Anderson points
out, 20 currencies lost 50% of their value each year. From 1980-99,
emerging markets struggled mightily and barely grew. And as you see
from the chart, their balance sheets went south as well.

Emerging Market returns during this period were poor overall. A dollar
invested in emerging markets in 1990 was still worth only about a
dollar 10 years later. In 2000, though, the game changed again.
Emerging markets opened up. They cleaned up their debts. And the
emerging markets went on a tear that continues today.

In general, emerging markets still have healthy balance sheets today.
In fact, they are as strong as they've been in 50 years. At some point,
that will swing the other way, as these things always do. At some
point, there will be too much debt and too much leverage. But for now,
that condition seems a ways off.

As Anderson concludes, "All the preconditions are in place for a
protracted period of strong economic growth." He guesses 5-6%, which
would crush the Developed World's growth rates. In fact, the superior
(and diverging) growth rates of the Emerging economies are already very
visible.

First up, take a look this graph, from The Economist, which shows the
industrial production of emerging Asia compared to the United States.

Looks like Asia is recovering pretty well. The chart above clearly
illustrates the "decoupling" that became such a hot topic of discussion
last year. The idea was that the Emerging markets would not necessarily
follow lockstep with the Western countries.

The Developed World suffers through what Richard Koo, the chief
economist at Nomura Research in Tokyo, calls a "balance sheet
recession." The Western world suffers from too much debt. That fact
shifts the focus from making profits to repaying debt, according to
Koo. Debt repayment will continue until the West repairs its balance
sheets, a process that takes years to correct, as Japan's long
recession shows.

So the same dynamics that make emerging markets look good, work in
reverse for the Developed World. According to Anderson's model, the
stressed balance sheets of the Developed World predict slow growth.

As investors, then, we'll have to continue to look to the emerging
markets for growth. The market never ladles out its rewards evenly,
though. To drill down further, the big winner is really Asia and its
big markets of China, India and Indonesia.

Anderson estimates that these regions could grow 7% or more annually,
well above the tepid rates of developed markets and better than most
emerging markets. "This is a very hefty gap," he writes, "and one that
is very likely to continue to reward investors who take advantage of
the opportunity."

Chris Mayer

for The Daily Reckoning Australia

• The Century of the Emerging Markets
• Investors Sold Japan Along with the Emerging Markets
• Emerging Markets Are Still a Buy
• There Are Two Ways of Studying Economic Theory
• Government Could Succeed in Reflating the Bubble

In a speech earlier this week Kohn said, "In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability."

As Aussies know from yesterday's credit figures, you can reduce aggregate demand in an economy by raising interest rates. But you can't reduce demand in your own economy if your interest rates and your currency are pegged to the value of the U.S. dollar. This is the dilemma much of the developing world finds itself in.

They are simply going to have to let the U.S. dollar go. The Fed makes rate policy suitable for the American economy. The American economy is bloated with debt and on the verge of a recession. The Fed reckons slow growth is a bigger threat to the U.S. economy than inflation, so it's leaving rates low.

Sometimes it's hard to say goodbye. It's been a decent macroeconomic policy to make things, peg your currency to the greenback, and sell to the American consumer for the last 50 years. He had cash. He had credit. And his appetite for stuff seemed nearly inexhaustible.

But human beings have the same appetites...for calories...for cars...for the good life. And there are a lot of human beings chasing better standards of living. There is plenty of demand in the global pipeline. Anticipating this, the world economy needs to rid itself of its America addiction. But it's going to have go cold turkey.

The transition toward more domestic consumption in developing economies isn't going to be seamless or smooth. It's going to be bumpy. There will be pushing and shoving. For investors, there might not be too many places to keep your money safe. If paper currencies are relatively unsafe, tangible assets may be relatively safer.

The trouble for investors is that rising commodity prices don't necessarily equal rising share prices for commodity producers. You have to be selective.

We reckon commodities themselves are probably due for a bit of a breather in the second half of the year. The ongoing solvency crisis in the financial sector is going to be a major drag on the share markets. But in the meantime, the long-term trends should favour Aussie resource investors.

Besides, everyone is so gloomy those days. We should know. It takes a gloomster to know a gloomster. We see a lot of gloomsters around. That worries us. Are we missing something?

If everyone is convinced nothing is worth buying and nothing will go up, what does that tell you? Has sentiment gotten as bad as it will get? If the stock market leads the economy, could we see a turnaround in the second half of this year, forecasting the bottom of the credit crisis and U.S. housing prices in the first quarter of next year? More on that tomorrow.

Dan Denning
The Daily Reckoning Australia

• U.S. Dollar Bulls Rallying Behind Fed Statement
• Fall in Commodity Prices Will Reduce Inflationary Forces
• Vietnam: The Next Bubble in the Emerging Markets
• How Much Worse Can the Stock Market Get? A Lot Worse
• Technical Analysts see the Market 80% Psychological and 20% Logical

We see the hot air flowing into the oil market, for example. Barron’s reports that $260 billion has gone into indexed commodity strategies – up from only $13 billion at the end of 2003.

And looking at a chart of the NASDAQ, 1990-2000, we find it looks familiar. Yes, dear reader, the oil market 1998-2008 looks a lot like the dotcom market (traded on the NASDAQ) eight years before.

Of course, many are the reasons why you might think oil will get more and more expensive. But so were the reasons that you might have expected the dotcoms to keep going up. And prices of Miami condos to keep going up. And tulip bulbs.

‘Oil is different,’ we can hear you saying. The economy can’t function without it. More and more people are buying it. The Nigerians are blowing up pipelines. Production has peaked out. T. Boone Pickens says it’s going up. The Chinese are hoarding for the Olympics, and so forth.

Maybe so. But human beings err, said Rosmini. The more reasons they have to believe something...the more they tend to believe it to excess. And the sadder they are when their beliefs are proven incorrect.

As to emerging markets, Alan Abelson, in Barron’s, believes they are in bubble-mode too. “Decoupling” is hooey, he believes. When the world economy heads down, they’ll go down with it.

But many emerging markets are already down – big time. Shanghai is off 50%. Vietnam even more. Are they bubbles that have burst...and can’t be reflated? Or are they still bubbles-to-be...waiting for the next gush of hot air?

Today’s paper tells us that Vietnam has done something extraordinary. It has banned gold imports in order to try to reduce its trade gap. Vietnam has an inflation rate of 25%. So, the Vietnamese try to protect themselves in the way people always have – by trading paper currency for gold. So great was this traffic that Vietnam became the world’s largest market for gold – bigger than China or India. And so great was pressure on the Vietnamese economy and its currency, that government officials moved decisively to make the situation worse – by banning gold imports.

Still, colleague Manraaj Singh, for example, thinks Vietnam is a buy:

“Vietnam’s Ho Chi Minh City share index continues to be a leader this year. Once it led on the way up, this year it’s been leading global markets on the charge down. The index fell every on trading day in May and in early June as well. It’s now down by 60 per cent since the beginning of the year.

“...Which begs a simple question: are we stark raving bonkers to still be in love with Vietnam?

“At the end of May, inflation in the country hit 25 per cent – the highest level since 1993.

“And then there is the trade deficit. It is expected to be above $15 billion for the first five months of this year. That’s a considerable increase on the 2007 deficit of $12 billion.”

But the Bank of Vietnam is serious about fighting inflation, he says. It raised rates from 12% to 14% last week – still more than 10% below the level of CPI.

Manraaj continues:

“That was the second interest rate rise in just three weeks and makes the highest in Asia. Investors were looking for a sign that the government was serious about tackling inflation and they got one.

“Better yet, the government has indicated that it may raise rates even further in order to bring inflation down to single-digit figures by the end of next year.

“In Vietnam, food accounts for almost 43 per cent of the consumer price index. And the rise in food prices has been a global phenomenon. The global rise in rice prices this year has had a huge impact on Asian countries. In the Philippines, armed soldiers were required to guard the countries rice supplies.

“Even here in London, the Chinese restaurant across from our office has put a 30p ‘temporary surcharge’ on all its rice dishes. ...

“But Vietnam’s finance minister, Vu Van Ninh, says that the country now has sufficient supplies to avoid further price increases, while still exporting 4.5m tonnes of rice this year. So we should see a sharp drop in food inflation in Vietnam this year.

“Just look at the other great bugbear that has spooked international investors – Vietnam’s soaring trade deficit. It isn’t anywhere nearly as dire as it sounds either. Far from it...

“Vietnam’s biggest import items are machinery and equipment (‘M&E’), construction materials and refined fuel. These are all items that are vital to the development of an emerging economy. Most of them still have to be imported, but that’s changing fast. A lot of these capital goods are being used to build-up domestic manufacturing capacity – factories and infrastructure. It won’t be long before it is able to locally produce a lot of what it now imports. Take steel, for example. Vietnam is a net importer of steel today, but it’s expected to have enough pr, but it will soon have sufficient production capacity to satisfy domestic consumption.

“There’s a world of difference between a country that has a trade deficit because it is importing equipment and material to build factories, power plants and roads, like Vietnam is doing; and one that has a deficit because it is addicted to imported Sony Playstations, iPods and cheap sneakers.

“Again, we’ve seen global markets reeling under the impact of surging energy prices. But what very few people realise is that Vietnam is actually self-sufficient in terms of crude oil production. What’s been missing is a domestic oil refinery. So the country has actually had to export 100 per cent of its crude oil and then re-import it as refined fuel. That’s been a major contributor to its trade deficit and it’s also been a major driver of inflation. But the country’s first oil refinery is going to come on-stream in 2009 – and that should have a massive impact on both inflation and trade deficit.

“Vietnam’s government is obviously on a steep financial learning curve – remember that this is still a Communist country – but they’re learning fast. And, crucially, they’ve shown that they’ve got the will to act.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

• Vietnam Stock Exchange Plunges, Investors Trading in What Little Dongs They Have
• The Century of the Emerging Markets
• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation
• Emerging Markets Are Still a Buy
• Emerging Markets Means Only One Thing to Us: A Buying Opportunity…

But today, we’re not so sure...

Ah, that’s the trouble with growing older. You lose your dreams and youth. You lose your bearings too. We had lunch in the House of Lords yesterday, with our old friend Lord Rees-Mogg, who turns 80 next month. But more on that in a moment...let’s first turn to the financial news.

Today’s big headline concerns Fed chief Ben Bernanke. According the Financial Times , he broke with long standing tradition in order to express himself on the dollar yesterday. Alas, the fall of the greenback has “contributed to the unwelcome rise in import prices and consumer-price inflation,” he said to an international banker’s forum.

The headman at the Fed may want a stronger dollar...or a weaker one; it’s usually not his place to say so. That’s what the Treasury Secretary is for. Henry Paulson, of course, says the same thing; the United States wants a strong dollar. But nobody believes him. Investors seemed to take Mr. Bernanke more seriously.

Stock market investors sold shares and drove the Dow down 101 points. Over in the oil market, the black goo sank $3.45. And gold, too, was sold on the news...it sank $11 to $885.

But let’s think about this. What could the Fed do to protect the dollar? Easy...it could raise interest rates. But if the Fed wanted to protect the dollar, why has it waited so long? The greenback has lost about half its value since 2000, why didn’t it try to protect it sooner?

Ah, dear reader...the plot has become a bit confused. Let’s see if we can remember it.

In the 15-year period known as the “Great Moderation” central banks could increase their supplies of money 2, 3, 5 times as fast as GDP growth. Normally, this would cause inflation. But it didn’t, because globalized markets...along with a few other key trends...we’re holding consumer prices down. So, the inflationary money went into asset bubbles...dotcoms, houses, and the financial industry.

But after the housing/finance bubble popped last year, consumer prices rose – even while the world economy softened. All of a sudden, the world seemed to be spinning in the wrong direction. Instead of holding down prices in the United States and Europe, China was increasing them. China’s domestic inflation is running at more than 8%. And she’s exporting her inflation to the rest of the world. Import prices from China into the United States are now rising at 4% per year...after falling about 1% each year during most of the 21st century. As for imports from the rest of Asia, they were falling in price as recently as the first half of ’07. Now, they’re going up by 4.3% per year.

And even as demand for basic commodities slows in the developed world, demand from the emerging markets makes them more expensive. Ai yi yi...globalization is no longer a force for good...but a force for evil! Now, earnings and housing prices fall in the United States, for example – while Americans are forced to compete with Asians for food, fuel and jobs too.

House prices in America are still falling. Foreclosures continue to rise – especially in places such as Las Vegas, which has the distinction of being the “mortgage fraud capital of the world.” And now comes word that people are not only abandoning their houses – but their pets too. Yes, the Society for the Prevention of Cruelty to Animals says that owners are leaving their dogs and cats behind. And pet food banks, operated by the SPCA, are said to have people lined up down the block to get free food for their pets.

Meanwhile, Winnebago says it has had to put its Iowa plant in neutral. The company makes luxury land barges, which have been a big hit with Americans for many years, allowing retirees to take to the open road whenever the mood strikes them. Problem is, motor homes are expensive to buy...and now, with gasoline over $4 a gallon, extremely expensive to operate. In real terms, gasoline is higher than it has ever been in the United States...considerably higher than the $3 it hit (in today’s money) in 1981.

On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts. But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report , has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets...while laying off employees by the thousands...in a desperate bid to ‘fix’ its Wall Street profile, keep its ‘shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3’ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

Of course, we can’t tell you what the name of the firm is here – but Dan will in his new special report…along with advice on how to pile up as much as 200% gains, as this firm pays the piper for its massive mistakes. Click on the link below:

Money-Tripling Gains on the Next Wave of Wipeouts and Write-downs Ahead

The feds’ response to this situation – so far – has been to cut rates, bail out financial firms, and hand out money (rebate checks). This inflation (along with robust demand from the emerging markets) has made itself felt, mainly, where the feds didn’t want it – in oil, gold and commodity prices.

But now, commodities are looking toppy. Oil seems to be slipping. Gold too. And the feds are talking about reversing direction – raising rates in order to protect the dollar!

Has something important changed? Well, yes...and no. More tomorrow...

*** Hillary seems to have come to the end of the road.

“Clinton’s White House dream draws to an end,” says the Guardian .

Too bad. She was such a wonderful reminder of what politics is all about – empty, fraudulent, jingoistic, ready to say anything to anybody if she thought it would get her back in the White House.

But it is an historic moment for America, says the press. Rather than choose a white woman to represent them, the Democrats have chosen a black man. You’d think history would have better things to talk about.

*** The older you get, the more doubtful you become. If you’ve had your eyes open you’ve seen countless plans, predictions, and programs go awry. Plan A is almost always replaced by Plan B...and then Plan C. And you’ve discovered that the people who are most sure about things are those who turn out to be the biggest numbskulls.

“I don’t know,” said our old friend Lord Rees-Mogg over lunch yesterday. “I think when you get older your mental faculties change, so you’re not as quick or as smart in some ways, but smarter in others.”

We were about to ask: ‘In what ways do you get smarter?” But the subject changed to the pudding. The dining hall in the House of Lords has to be one of the best restaurants in London. We recommend the calves liver.

Our old friend is celebrating his 80th birthday this year.

“Age may not be a great advantage when you are mountain climbing,” he went on. “But it helps when you are investing. Because you’ve seen so much more than young investors. And you tend not to get too excited. Your emotional reactions are more moderate. Tempered by time and experience. You’re not as like to make big mistakes because of an excess of enthusiasm.”

Lord Rees-Mogg may be right; but we’d rather be younger anyway.

Bill Bonner
The Daily Reckoning Australia

• No Great Slump, but Stagnant Inflation Looms
• Level 3 Assets Growing in All Five U.S. Investment Banks
• U.S. Fed Leaves Rates Unchanged, Morons
• The Biggest Financial Deception of the Decade
• General Electric & Lift Capital Usher in Rough Start for ASX

Well, we don’t know. But we’re beginning to think our colleague, Manraaj Singh, is right. This is the Century of Emerging Markets.

“The first oil shock of the ’70s was fundamentally a transfer of wealth from the Western oil users to the oil producers,” he says. “Now, we’re seeing a transfer of wealth to the oil producers...and to the food and raw material producers too.”

The latest news is that the emerging markets have already recovered from their October-March losses. You’ll remember, dear reader, that they were hit especially hard by news of a credit crunch in the West – even though they, generally, had no exposure to subprime debt. But now they’re booming again.

The MSCI Emerging Market index has gone up four times in the last five years. Compare that to the Dow – which is flat.

Much of that growth can be traced directly to the boom to the commodities that these countries export – but not all. Some emerging markets – notably China – export neither food, nor fuel, nor raw materials. Instead, they are the biggest importers of these things in the world. In other words, they should be the countries that suffer most when prices rise. Instead, they’re booming too.

“In 1990, China imported 20,000 metric tons of copper. Today, it’s over 1 million...a 50-fold increase in less than two decades,” Capital & Crisis ’ Chris Mayer tells us. “China is now the world’s leading copper consumer.”

China’s not the only market to keep your eye on. Chris has been eyeing up India, whose modernization is about 13 years behind China’s, for a while now...and with good reason.

“Copper is one of the essential materials for any developing economy – for housing, for commercial construction and especially for an ever-expanding electrical grid...and you can imagine how copper use in India is about to explode.”

And copper is the main business of the next great Indian opportunity Chris has identified. In fact, this company is by some accounts the lowest-cost producer of copper in the world – at just 7 cents a pound.

What seems to be happening is that the emerging markets are doing just what you’d expect. After listening to so many lectures from so many American advisors and busybodies, they’ve finally turned on and tuned in to the new paradigm of modern development. It doesn’t seem to matter what kind of government they have, by the way. Oligarchy, communist dictatorship, old-fashioned dictatorship, popular democracy, monarchy – George W. Bush tells the world that it must have an American-style democracy in order to get rich; he needs to open his eyes. All these emerging markets have access to capital and technology...they have the desire... and they have globalized markets that allow them to sell what they make and buy what they need.

Will mistakes be made? You bet. Huge mistakes. Costly mistakes. But, at least from what we can see, there seems to be no stopping them. Which also makes sense. One of the universal laws of economics is ‘regression to the mean.’ The United States – along with other developed countries – must be expected to regress to the mean. There is no inherent reason why they should be richer than other countries – at least no reason we can see. Now, with the emerging markets growing fast...and sub-par growth the “new normal” in the United States...one rises, while the other falls. Before too long, they will meet – at the mean.

Bill Bonner
The Daily Reckoning Australia

• Emerging Markets Are Still a Buy
• Emerging Markets in the New World Disorder
• Vietnam: The Next Bubble in the Emerging Markets
• Still Opportunity in Emerging Markets – Especially India
• Investors Sold Japan Along with the Emerging Markets

"Cheap clothes may soon become a thing of the past," reports MoneyWeek.

"Simon Wolfson, the chief executive of Next, warned that clothes prices may have to rise by up to 5% to offset rising costs from China and Europe. The strong euro and demands for higher prices from Chinese manufacturers mean that 'we will begin to see higher costs coming through in spring, summer next year. The way that retailers are going to have to cope with this is to pass the increase on.'

"That 5% may not sound like much, but we haven't seen clothing price inflation in more than 10 years. And once the price of clothes starts going up - well, nothing will be getting cheaper any more."

Well, it was fun while it lasted - The Great Moderation, that is. The United States could emit pieces of green paper without causing consumer prices to go up. Because globalised wages and finished product prices were falling fast enough to offset it.

But inflation is back. Like spring pollen and sulphurous pollution, it is darkening the air in China. And now people in Europe and America are beginning to rub their eyes and sniff, too. Gasoline hits new records - along with the oil price - every week. Food prices are so high that many nations are taking emergency action to control them. Soon, consumer price inflation will be a problem for nearly everyone.

*** Oh... yes... the oil market. Nations don't have friends, said one savvy strategist, they only have interests. And since the beginning of the Industrial Revolution, one primary interest of ambitious nations was securing supplies of energy.

Alan Greenspan told the world that the war in Iraq was largely "about oil." John McCain says that if we didn't have to import oil it would "prevent us from having ever to send our young men and women into conflict again in the Middle East." Sounds like he thinks the war is "about oil" too.

But one thing the war in Iraq has shown is that American cannot control its oil supply - even when it is fool enough to send in armed troops. The price of crude was only $26 a barrel when the war began. It was $126 yesterday.

*** "Yes, there'll be many more crack-ups," said a young hedge fund manager who came over for a drink on Sunday, "but in the long run, the emerging markets are going to grow much more than the U.S. or Europe. That's where I want my money."

He put his money into India, primarily. The results were spectacular - until 6 months ago. Then, almost all the go-go markets went. Still, looking at the big picture, over the long term, he is probably right. The emerging markets are probably a better place for your money than the United States.

The fundamental conceit of Americans over the last 50 years was that the foreigners were so hopelessly incompetent that even if we gave them a helping hand they could never challenge us. But now they are challenging us... and beating us at our own game. They invest more, save more, and produce more than we do - even the communists. Meanwhile, we focus on soft service industries - health, finance, and education - where the actual return on investment is hard to measure and often negative.

Bill Bonner
The Daily Reckoning Australia

• Emerging Markets in the New World Disorder
• The Century of the Emerging Markets
• Investors Sold Japan Along with the Emerging Markets
• Emerging Markets Means Only One Thing to Us: A Buying Opportunity…
• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation

"The results from investing in emerging markets, over the last five years, have been spectacular," he said. "It's only in the last few months that they have fallen off. But this probably means that this is a great time to get in."

Julian reminded us of one of our 5 "Big E" themes - the Exodus of wealth from the developed countries of the emerging markets.

Some day, when the economic history of this current period is better understood, people will see that the world owes a huge debt of gratitude to the American consumer. Against his own interest, he has put himself deep in debt so that others could have prosperity...and have it in greater abundance. The Exodus of U.S. wealth was probably going to happen no matter what. But the American consumer - like Pharaoh's army - chased it to the waters' edge, where the Fed, with its easy money policies, parted the sea so it could get across. By spending money he didn't have on things he didn't need, the US consumer hastened the flow of money from America to the exporting nations - the Arab oil exporters, China, India, Brazil, and Russia. Now, all these nations are flourishing...with rising currencies...huge current account surpluses...trillions of dollars in reserves...growing middle classes...and soaring wages. And the poor American consumer? Again, like Pharoah's poor soldiers, he is being swallowed up under the waves of "flation." The value of his house is being reduced by deflation. And the value of his time and his money are being cut down by inflation. The poor fellow. The Chinese, Indians, Russians et al should at least thank him.

*** What about Japan, we asked Julian? Japan is a special case. It is the only country to maintain low rates of currency growth, and the only one to be locked into an on-again, off-again deflationary recession for the last 18 years. Stock prices in Japan are barely a third of what they were in the '80s...and the country has no exposure to sub-prime debt, still investors sold Japan along with the emerging markets in October of last year.

"Is this a good time to buy back into Japan?" we wanted to know.

"No, I don't think so," was the answer. "Japan is not a bad economy. And stocks are not bad values. But there is nothing on the horizon that is going to make them go up much either. The emerging markets are good places to invest because they have huge domestic markets and they are growing rapidly. Japan is stable..."

Japan also has the distinction of actually losing population. In America, we honor mothers and fathers. In Japan, they celebrate "National Child Day." But for the last 27 years, there have been fewer children to celebrate each year.

*** A contrary view of Japan comes from Christopher Wood. Here is the Bloomberg report:

"The 'bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies' pricing power and, consequently, their profit margins.' Consumer prices rose at the fastest pace in a decade in March, suggesting the economy has emerged from a deflationary spiral. Price gains also boosted expectations the Bank of Japan will raise interest rates, allowing banks to charge more for credit. Wood increased the weighting of banks in his model portfolio of Japanese shares, recommending investors hold 24 percent of their assets in the nation's four largest lenders. Banks comprise 12 percent of Japan's 1,722 member Topix index. Sumitomo Mitsui Financial Group Inc.

*** Meanwhile, our friend Michel reminds us that not all investments in art are bad ones.

"One day in 1880, a dealer proposed to Collis P. Huntington, one of the founders of the Central Pacific Railroad...and the state of California, a certain number of old paintings, unsigned, at $2000 each. Huntington chose one, 'The guitar player,' and paid $750 for it. Later, experts attributed the painting to Vermeer.

"I saw the money in it," said Huntington.

Bill Bonner
The Daily Reckoning Australia

• The Century of the Emerging Markets
• Emerging Markets in the New World Disorder
• Emerging Markets Are Still a Buy
• Emerging Markets Means Only One Thing to Us: A Buying Opportunity…
• Still Opportunity in Emerging Markets – Especially India

"More importantly, you're wrong about Diocletian. Not about his economic policies, but about the Piazza di Navona. It was not Diocletian who built a stadium there; it was Domitian. Big difference."

Our reader is wrong and right, in that order. That is, he is wrong about emerging markets and right about the Piazza di Navona. As to the latter, we were misinformed...and realized it when we were having a cup of café latte out in the square and looked over and saw the "Ristorante Domiziano" on the opposite side. Why would they name a restaurant after Domitian in Diocletian's square, we wondered. Turned out, it was Domitian's square, not Diocletian's.

About Domitian, we knew nothing. So we looked him up. (More below...)

As to emerging markets, our Dear Reader has noticed that they have taken a beating. Shanghai was in a bubble - as we pointed out a year ago; it is down now 50%. Vietnam is down 53%. Many others have been hit hard too - although, the Latin American market has held up well.

Emerging markets are among the many things we know little about. But that doesn't stop us from having opinions. And our opinion is that the world is turning. That will come as no shock to you, Dear Reader. You get up in the morning and see the sun rise. In the evening you see it go down. You took science classes. You know how it works. The planet spins on its axis.

You've read the poets too. "Gather ye rosebuds while ye may..." they warn us. Because "this same flower that smiles to-day To-morrow will be dying..."

You know what we're getting at, in other words: things change. "You're riding high in April...you're knocked down in June..."

Well, that's our point. This is April. June is coming soon. And that bright light that shined so beautifully, warmly, wonderfully on the West...is now headed East - to the emerging markets. Those markets are having a correction...which could turn out to be a buying opportunity.

Long time Daily Reckoning sufferers know we don't know...that our 'big picture' analysis is just guesswork. We breathe. We eat. We are mortal. And like all mortals, we live in darkness...with only an occasional flicker of light to shine upon our path.

Looking ahead, what we think we see - through the dense fog of news and opinion - is a world of 'flation.' That is the fundamental condition of the world economy ever since 1971, when the golden shackles were taken off and the world's money supply was allowed to run wild. The U.S. money supply is said (the government no longer gives out the numbers) to be increasing at 20% per year. Interest rates are being pushed down by the Fed. The U.S. federal government is running a record deficit...and financing the most expensive war in history with borrowed money. (This 'world of 'flation' is what our documentary I.O.U.S.A. looks at closely. If you're in the Baltimore area, come see the film at the Maryland Film Festival next weekend. See here for all the details.)

Rome got itself into a similar bind. It couldn't support the empire from its own resources. It had the reserve currency of the day...but it was a metal-based money. All emperors could do was to send more slaves to the mines to try to dig out more silver and gold...levy more taxes...and squeeze more money and resources from Rome's far-flung tributary nations.

The population of Rome itself rose to over 1 million people - far more than could be supported by the local economy. What resulted was the equivalent of a huge trade deficit - with shiploads of wheat, marble, wood, wine and other products arriving at the port of Ostia, near the capital, and then shipped up to Rome itself.

By the time of Domitian, this trade deficit - combined with almost constant warfare - had already brought a substantial inflation to the empire. Domitian's father, Vespasian, had devalued the currency. But Domitian was the Paul Volcker of Emperors. He actually restored the value of the denarius to Augustine levels, increased tax collections, and managed to leave the government with a surplus.

*** Let us return to the news and to our look at the essential picture. From the Financial Times comes the view from the sunny side of the street:

"The optimistic view is based on two distinct elements. First, that the deleveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system.

"Both views have merit. Financial institutions, particularly in the US, have recognised the scale of the problem and are taking remedial steps. Just witness the recent round of capital raising by Citigroup, Merrill Lynch, JPMorgan and Wachovia. At the same time central banks in Europe and the US have opened up their financing windows, expanding the size of the financing, the range of institutions that can access it and the list of eligible collateral."

The report goes on to suggest the alternative...that policy reactions (by the Fed and other central banks) may be "too little, too late."

And here, we think the writer is wrong on both scores. That is, the real problem is not one that can be fixed by putting more money into the banking system. It's more basic than that. When a bubble pops, it's almost impossible to pump it up again. You pump and pump...but the air goes somewhere else. The consequence of the dot.com bubble, for example, was that expectations for the new age of computerized communications were over-bought. New money could be put into the system. But the new money didn't go into dot.coms. It went into housing and finance. Now, those bubbles have popped too. The authorities are pumping new money into the banking system...but where is it going? We already have plenty of houses in America - more than enough. Don't expect a boom in the housing industry anytime soon. And take all those leveraged, sophisticated CDOs, MBSs, SIVs, and the rest - please! Who's going to put more money into those?

No, dear reader, that's not the way it works. New money looks for a new home...a new bubble to inflate...not one with a hole in it.

Our guess...and again, we warn readers that we are just guessing...is that this inflation is going into gold, commodities, oil...and, yes, emerging markets. Our guess is that the setback for emerging markets is just a correction, not a fundamental shift of direction.

Our guess is that the setback for gold - down below $900 - is also just a correction, not the end of the bull market. Indian stocks...the Vietnamese economy...commodities...gold - all still have a lot of room on the upside.

Our resident commodities guru, Kevin Kerr, couldn't agree more. "A nasty rumor has been going around that the commodity markets are old hat and will soon go the way of the dinosaur," says Kevin.

"'They' have been saying that since I started on the floor almost 20 years ago. I'm here to tell you that not only are these markets stronger and more modern than ever, but there's never been a better time than right now for investors like you to make lifestyle-changing profits, and probably more quickly than you ever thought possible. I know, because I've done it myself!"

*** But let's go back to the Financial Times for a look at the dark side of the street:

"Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

"While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks."

Bill Bonner
The Daily Reckoning Australia

• “Did you see Berlusconi?” asked Elizabeth
• The Century of the Emerging Markets
• Vietnam: The Next Bubble in the Emerging Markets
• Commodity Inflation Causes Consumers to Cut Back on Spending
• Still Opportunity in Emerging Markets – Especially India