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A world-shaking event occurred this week in the global financial arena, and its impact will be felt for years to come. It will yank the wind straight out of the U.S. dollar’s sails and force a fundamental de-valuation of assets down to emerging-market levels.
Five leading nations — Brazil, Russia, India, China and South Africa — are starting their own financial system with a development bank funded exclusively by their nations.
They aim to establish an easy convertibility of currency (the real, ruble, rupee, renminbi and rand, respectively) and a focus on building long-term business relationships among themselves.
This isn’t just some emerging-market version of the euro zone. These up-and-coming economic leaders are opening the doors of opportunity for emerging-market companies that are positioned to challenge the global giants in their respective industries.
As an investor, you can’t afford to ignore this friendly meeting of the BRICS. (Note the fairly recent addition of the “S” with South Africa.) Here are three reasons why these countries are banking on a declining U.S. dollar and lessening U.S. influence … and why it may benefit you to do the same in the very near future!
Reason No. 1 : With this, the BRICS are set to assume pole position in global financial governance.
BRICS nations represent nearly half the world’s population. Two of them are already among the top five economies in terms of purchasing power parity. (That is, an “exchange rate” of sorts as measured by the amount of money needed to buy the same goods/services in different countries). Four are in the top 10.
The plan strengthens financial cooperation among the BRICS’ development banks. This comes as leaders from Brazil, Russia, India, China and South Africa are seeking a bigger say in running the International Monetary Fund and other multilateral bodies to match their rising economic heft.
But these are not all investment-grade countries that can issue bonds to fund a new bank. One suggested solution is to dedicate a proportion of BRICS members’ foreign reserves to a trust fund that would back-stop the borrowed capital.
In the case of the World Bank, the total paid-up capital is around 10% while the rest is AAA-rated, “callable” capital. To enhance the creditworthiness further, existing multilateral banks and other Western countries could also be given minority stakes.
If you consider that these five countries now hold over $4 trillion in foreign currency reserves, the creation of this type of bank could mean some very serious contributions of capital. And this is clearly going to make these fast-growing countries, well, grow even faster!
Already, The IMF projects 2012 economic growth at 3% in Brazil; 3.3% in Russia; 7% in India; 8.2% in China; and 2.5% in South Africa. In contrast, the U.S. growth this year will be 1.8% while the 17-nation euro area will shrink by 0.5%, according to the IMF estimates released last month.
And trading in local currencies will strike a blow at the U.S. dollar and euro as a reserve currency, increasing the role of China’s, Brazil’s India’s and even Russia’s currencies relative to the U.S. dollar and the euro. This in turn would make it even easier for these countries to sign more-favorable transactions with other parties that would have normally demanded dollars.
Reason No. 2 : This will also have real production and political effects.
Don’t assume this is just trade finance for only agricultural and natural-resource products.
Brazil will make a special effort to show that the country’s economy is more than just commodities and raw materials. Some of the businessmen traveling with the president will be from cutting-edge technology corporations.
Reuters is indicating that Brazil may be about to choose France’s Rafale fighter jet as the new aircraft for its military — at least a $4 billion deal from this emerging-market player that’s eager to become an economic superpower. If the deal goes through, it will come directly on the tails of India’s decision to buy 126 of the company’s warplanes.
Speaking of India, its relationship with the U.S. administration is better than ever before. However, there’s no guarantee that differences on some sensitive issue in the future won’t push the U.S. toward sanctions that could curtail this development or create other support issues. A conflict with Pakistan could be an example. Likewise, Brazil’s clear support for Cuba and Venezuela could at some point create similar problems if they selected the U.S. option.
More importantly, though, it’s extremely interesting that India and Brazil are discussing a military accord, since each country could complement each other in the industrial sector.
In addition to modernizing its fighter jet fleet, Brazil is seeking to obtain a transfer of software technology for the nuclear submarine that it is planning to build in partnership with France. And India officially rejoined the nuclear submarine operators’ club when the Russian manufacturers handed over to an Indian crew the Nerpa, in Russia’s Far East.
These and other proposed intra-BRICS initiatives like improving global governance will not only contribute to enhanced intra-BRICS trade and investments, but they would also facilitate growth in difficult economic times for these countries.
Reason No. 3: It’s no surprise — the winners are the top emerging-market industrial and technology companies.
These developments and the new financial arrangement will create many new investment opportunities for investors that did not exist before AND strengthen some that are already available.
Keep in mind, though, that this financial alliance won’t be the easiest thing to implement. There will be points where these countries disagree.
For example, under intense pressure from the Russian government, India may consider working out a solution to grant some relief to Sistema Shyam TeleServices Ltd. According to official sources, SSTL’s case may be treated differently from others whose licenses were ordered to be canceled because it is the sole operator based on CDMA communication technology.
If you would like to follow these stories, I encourage you to take my Emerging Market Winners newsletter service for a risk-free test drive. As a member, you can easily follow the growing list of public companies that will benefit from this tectonic shift in focus and resources among the world’s fastest-growing emerging economies.
Rudy Martin, editor of Emerging Market Winners, is widely recognized as an authority on stock and ETF investing. With more than 25 years of investing experience, Rudy started his investment career by co-managing a $2 billion private equity portfolio for Transamerica. He also served as an analyst for DeanWitter and Fidelity Investments, and research director of a quantitative research firm that is now part of TheStreet.com. Recently he has been providing his investment ideas directly to a select list of global hedge funds as Managing Director of Latin Capital Management, an institutional money management firm with more than $180 million in assets under management. For more information on Emerging Market Winners, click here.
The last decade has been a wonderful time for Gold Bugs and Silver Bugs. We have profited and protected our wealth against inflation. Gold has risen from around $250 per ounce in 2001 to a recent high of $1917.90 and silver has risen from around $5 per ounce in 2001 to a recent high of $49.81. These numbers are quite exciting for anyone involved in the precious metals markets. Being a Silver Bug myself, I have to admit the ride up has been rather erratic. Long ago I had to learn to ignore the daily Comex price of Silver. Gold and Silver will continue to be an important part of my future holdings, but going forward I am beginning diversification into other metals. Here is a brief overview of some of the rare industrial metals I like and why I believe they are a good choice for anyone who believes in holding physical metals as part of their asset strategy.
There are many who believe the world is in a recession and this may be true in the USA, EU, and other Western nations. There are a few of us who still believe that the speed of industry and commerce is accelerating. I have spent time in Africa, had an opportunity to live in Europe for a few years and I currently live in Panama. This experience has opened my eyes to what is happening outside of the USA. What I see is a great mass of people who were once walking now driving cars. These same people are talking on mobile phones, watching television on a flat screen, using their laptop at a cafe, getting better medical care, flying on vacations, living in modern homes and working jobs that require technology. This is happening across the planet! Can you imagine the impact on demand for rare industrial metals from countries of the BRIC, (Brazil, Russia, India, China), with the size of their populations? Like it or not commercialization was tested in the USA and was a huge success and now it has been exported worldwide. Here in Panama with a population of just over 3 Million we are adding 3000 automobiles a month to the roads. There are enough mobile phones in Panama to give every citizen 3 handsets. All of this takes a lot of natural resources and metals. Below are some of the important metals I would like to introduce to you.
Tantalum, the rare technical and industrial metal that gives technology the ability to be compact. Have you ever wondered why we no longer have to carry around mobile phones the size of a brick? The tantalum capacitor was a revolutionary invention for the world. Today you find tantalum in all of your personal electronics. Tantalum is now being used in in medical implants because it is non-toxic and does not react with body fluids. It is also used in jet aircraft as an alloying agent. Current worldwide production of tantalum is approximately 1160t annually. By 2030 just the demand is estimated to be 1410t. A few years back there was a lot of controversy surrounding tantalum because of its “Conflict Metal” tag. The metal was originally being mined in the Congo but most tantalum is mined in Australia, Brazil, and Canada.
Indium, how do you like that touch screen on your mobile phone? This rare technical and industrial metal has become a star among the elements recently. Indium’s uses in phones, computers, semi-conductors and televisions are well known. The one use that I would really like to highlight is in CIGS (copper-indium-gallium-selenide) thin film solar cells. These solar panels are the latest technology to hit the solar industry. Recently we have heard India, Japan, USA, Germany, Spain and many other countries announce huge solar initiatives. India alone signed into law a US $19 billion plan to produce 20 GW of solar power by 2020. Under the plan, the use of solar-powered equipment and applications would be made compulsory on all government buildings, as well as hospitals and hotels. This initiative alone will use up all the entire world’s production of solar cells. According to the USGS 84% of all indium production is currently used in solar cell production. Current worldwide production of Indium is approximately 600t per year. The future amount of indium required will depend greatly on the solar industry. Indium is mined in China, Canada, Bolivia and Japan.
Cobalt, have you driven a hybrid or electric vehicle lately? This rare technical and industrial metal is the one of the elements that makes the batteries in these cars possible. Cobalt is also used in pigments, super-alloys, non-corrosive medical implants, dental implants and jet engines. The top use today is as an alloy to make metals resistant to corrosion. The one I see real promise in is the use of hybrid and electric vehicle batteries. By 2012 the estimated sales of hybrid vehicles worldwide is approximately 2.2 Million and by 2015 to be at least 10% of the world auto market. Currently the biggest hurdle to these vehicles is the added cost and the ability to produce enough batteries to meet the demand. Cobalt has gained a lot of attention since the London Metal Exchange (LME) launched a cobalt contract in February 2010. Current worldwide production of cobalt is approximately 57,500t annually. The future is bright for cobalt. Every aircraft that goes in the air and every hybrid vehicle sold will put greater pressure on the supply of this metal. Cobalt is mined in Australia, Congo, Russia, Zambia and a few other countries.
These are just a few of the metals that our world needs to operate and the future is looking great for all commodities. I like the rare technical and industrial metals because of the tight supply and all of the wonderful uses for them. The mining of these metals is often a by-product of base metal like copper, lead and zinc. Most of the large deposits have been found and are in production. This translates into a very tight supply for the future and profits for investors. Silver and Gold have been my metals of choice for many years, but I see great opportunity for the person who is adventurous and willing to add another asset to their portfolio before the masses catch on.
By: Randy Hilarski – The Rare Metals Guy
January 13, 2011
By Martin Hutchinson, Contributing Editor, Money Morning
While prices for food and energy have been rising, inflation in the United States has remained relatively subdued.
One common explanation for that phenomenon is that U.S. inflation has been “exported” to China and elsewhere through the U.S. Federal Reserve’s monetary policy. And given the perennial U.S. balance of payments deficit, it’s good to know the country has found something it can successfully export!
However, the bad news here is that inflation does not stay exported – and in 2011 it may boomerang back to make life on Main Street miserable.
Thankfully, there are precautions we can take to combat higher prices and preserve our wealth.
U.S. monetary policy has involved excessive money creation since 1995, fueling asset bubble after asset bubble. However, it has not produced inflation in the United States because the dollar is a reserve currency, so excess dollars flow to countries whose economies are more vulnerable to inflationary pressures.
In the 1990s, the excess dollars flowed to Argentina, whose currency was pegged to the dollar. The imported inflation wrecked Argentina’s sound policies of that decade and contributed to a debt-fueled collapse in 2001. Since 2008, the excess money has gone to China, India, Brazil and other fast-growing emerging markets. It also has fueled a massive growth in foreign exchange reserves among the world’s central banks. Central bank holdings of forex reserve have grown more than 16% per annum since 1998.
China, India, and Brazil all currently have massive inflation problems. China, which has increased its inflation by holding down its currency against the dollar, has been very proactive in tackling inflation as of late. The People’s Bank of China (PBOC) surprised the markets on Christmas Day by raising its one-year refinancing rate by 52 basis points to 3.85% and increasing the benchmark deposit rate by 25 basis points to 2.75%.
The PBOC has increased bank reserve requirements five times in the past year and raised interest rates twice – albeit by a scant 0.25% each time.
China’s official inflation rate currently is 5.1%, up from 1.5% at the beginning of 2010, but its figures are suspect. The PBOC probably will have to raise its benchmark rate several more times from its current level of 5.81% before it’s able to bring inflation under control.
India’s inflation is about 7.5%, but is expected to rise further since food prices are surging at double-digit rates. Prices for onions, for instance, are up 33% from last year. The Reserve Bank of India (RBI) is again raising interest rates, now at 6.25%. But, as in China, sloppiness in official inflation statistics means Indian interest rates are negative in real terms and the RBI will have to continue raising rates if it wants to control inflation.
Brazilian inflation was 5.91% in December and is rising fast. Newly elected President Dilma Rousseff fired the central bank chief and is trying to bring interest rates down from their current level of 10.75%. Again, inflation seems likely to surge in the near term.
To complete the BRIC (Brazil, Russia, India, and China) picture, Russian inflation is currently running at 8.8%. That’s down from a year ago, but still much higher than the Russian government would like it to be.
With inflation rising in all four BRIC countries and many other emerging markets, the U.S. holiday from inflation cannot last much longer. The Fed’s second round of quantitative easing (QE2), which included purchases of $600 billion in Treasury bonds before July, and the December package of tax cuts are also fueling inflationary forces.
Money growth, which had been low in 2009 after the burst in late 2008, has once again risen to worrying levels. Over the last four months, the average growth rates of broad money on the Federal Reserve Bank of St. Louis’ Money of Zero Maturity and M2 Money Stock measures were up 10% and 7%, respectively. That’s comparable to their growth in the 1970s.
Furthermore, oil prices are approaching $100 per barrel, and other commodity prices are strong, as well. So however successful the Fed has been in exporting inflation since 2008, its success won’t last for much longer. At some point in 2011, inflation will be re-imported – and probably with a roar rather than a whisper.
When that happens, the Fed will have to raise interest rates to fight rising prices. Of course, Federal Reserve Chairman Ben Bernanke will almost certainly resist this inevitability, fudging figures and producing spurious arguments to avoid making the right decision. When the Fed does eventually raise rates, it will do so grudgingly – as it did during the period from 2004 to 2007.
That means higher short-term interest rates probably won’t arrive until 2012, and higher long-term rates could potentially be delayed by more quantitative easing. The result will be an unholy mess that takes the form of surging inflation in 2011 and a second recessionary “dip” in 2012.
Gold and other commodities will continue to offer protection against the surge in inflation in 2011, as they have in the last few years. At some point, though, the market will start to anticipate tighter Fed policy and gold and other commodities prices will collapse.
Still, in 1979-80, gold and commodities prices went on rising for more than three months following then-Federal Reserve Chairman Paul Volcker’s famous 1979 “October surprise,” in which he pushed up the Federal Funds rate by two full percentage points over a weekend.
If the gold and commodities markets didn’t believe the obviously serious Volcker would stop inflation until several months after he took decisive action, they certainly won’t have confidence in the actions taken by a reticent Ben Bernanke. So your gold and commodities investments will probably be pretty safe even if the Fed does eventually start raising rates. Certainly they are a good bet for now. More importantly, they will protect you against the pending surge in inflation.