Why We're Betting on India

Bill Bonner - Tue 01 Dec, 2009

Dubai is still in trouble, as the local Bedouins said they weren't putting their full faith and credit behind the Dubai World debt.

London, England

The Lost World... and a farewell to an old friend...

First: the noise. Stocks came back a little on Wall Street yesterday, with the Dow up 34 points. Gold rose $6 too.

Dubai is still in trouble, as the local Bedouins said they weren’t putting their full faith and credit behind the Dubai World debt.

We wonder how long it will be before the next pin pricks the bubble. Yesterday, the Financial Times said Greece was up next. Our own magazine, Money Week, concurred:

"Lax and inept, Greece is on a slippery slope."

But today, in the Daily Telegraph, Britain itself is sliding:

"Morgan Stanley fears UK sovereign debt crisis in 2010," is the headline story in the Business Section.

"In an extreme situation, a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The bank of England may feel forced to hike rates to shore up confidence and stabilize the currency, threatening the fragile economic recovery," said the Morgan Stanley report.

The situation is becoming clearer. Is it an illusion? Or is the fog really lifting?

We don’t know. But what we see is what we anticipated 10 years too early - a long, Japan-like slump, punctuated with crises, bankruptcies, and defaults. At the end of the ‘90s it was said that Japan had lost a decade. Now, it is ten years later, and the Japanese are becoming remarkably forgetful; they’ve lost another decade!

The Japanese have spent the last 20 years trying to bring about a recovery. There were hopeful signs several times. But then, each time, the economy sank again into recession...each time deeper than before. These stimulus efforts have been expensive, transforming Japan from a country with one of the world’s best public finances to one with the worst. Debt to GDP is already at 200%. It will soon be 300% if the government continues spending at the current rate.

What have the Japanese gotten for all this effort? Tokyo stocks have rebounded a bit...along with the rest of the world. But consumer prices are falling again. And now the Japanese are getting older, faster than any other group in the world. It is as if the whole nation had retired and the economy has been pensioned off.

But Americans lost that last decade too. No job growth. No income growth. No stock market gains. And now, it looks to us as though the US is on track to lose another decade - just like Japan did.

What was lost to the first world’s two leading economies was found by another part of the world that used to be known as the ‘second’ or ‘third’ world. India, China, Russia and Brazil have all grown by leaps and bounds - with income, stocks, GDP, prices, jobs...all up dramatically.

And now comes a report in today’s paper that our favorite emerging economy is still growing, more rapidly than was thought.

"India’s 7.9% growth spurt shatters forecasts," says the Financial Times.

This is good news for those who are hoping that emerging markets will provide the ‘growth’ needed to pull the world out of depression. The idea is simple enough. US consumers have slacked off. British consumers are out of money. European consumers are just naturally tight. And Japanese consumers are in a coma.

So, who’s going to do the consuming? Where’s the growth going to come from to keep Chinese factories polluting the atmosphere and Indian call centers confusing the customers? Well, from India and China...and Brazil and Russia...and the rest of the emerging world.

And here’s an interesting bit of information. Nouriel Roubini recently commented that there is no way the Chinese can replace American consumers. US consumption is 10 times greater than Chinese consumption. But he must have different information from a French fund manager who calculates that Chinese consumption has more than offset American thrift. At their peak in 2007, Americans were spending $380 billion per month at the retail level. Now, the figure is close to $345 billion - or a reduction of $35 billion a month.

Meanwhile, Chinese consumer spending has jumped from $110 billion a month to $150 billion - $40 billion more, and more than enough to compensate for Americans’ new found frugality.

At this rate, China will soon be redirecting its productive capacity - as India always has - at its own domestic market. It will cease being a major exporter and, if you can believe it, will become a net importer.

If this were to happen as forecast, it would open an avenue for America and its crony economies to escape from their Lost World. They could turn their economies from import to export...from consumption to production...from taking to making....and from trade deficit to trade surplus.

Sounds simple enough. But wait...there’s more. In order to sell things to the Chinese and the Brazilians, you’re going to have to be able to compete either on price or on quality. It’s hard to see how the US could compete on price, unless inflation cuts the price of US labor substantially. As to quality, typically, it has been the Germans, Italians and French who have the upper hand. The Germans make the precision tools. The Italians make the handbags. The French make the yoghurt. What does that leave?

Well, there’s still some room. But it will take time to gear up for it. Your editor, for example, has planted his flag - not the Crash Alert flag...his company flag - in India. He would like to plant a flag in Brazil too. But he’s not counting on these foreign ventures to pay profits anytime soon. It takes 5 to 10 years before a start up business really gets some momentum.

Between now and then, there are bound to be booms, busts and blow-ups.

What is true for our business is surely true for an economy. It takes time...trial and error...mistakes and corrections...training...boom, busts and blow-ups before something really works. And another lost decade or two...

More news from our London team:

"When is this stock market rally going to end?

"What will be the trigger?

Brian Durrant, of The Fleet Street Letter, is asking the big questions. And he is using AAII sentiment as a contrarian indicator.

"Each week, the American Association of Independent Investors asks members to file the answer to one simple question. ‘I feel that the direction of the stock market over the next 6 months will be bearish/ neutral/ or bullish’.

"We have examined the data going back to 1987. Since the series started the highest percentage of respondents that stated they were bullish was 75%. This reading occurred on 6th January 2000, coinciding with the peak in stock markets following the dot.com boom. Meanwhile since records began the highest percentage of respondents who said they were bearish was 70%, this figure was reported on 5th March 2009, just before the stock market bounced so impressively this year.

Interestingly, the AAII’s investors always seem to judge the big changes wrongly.

So what are investors saying right now?

"Less than half the correspondents are currently bullish."

"[Therefore], the rally has further to go.

"What is interesting is that investors have, if anything, been quite circumspect about the rally. There is none of the gung ho optimism that plagued the market during the dot.com boom when at its peak 75% were bullish."

To find out what The Fleet Street Letter team is recommending to make the most of this bullish indicator, click here.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

And more thoughts:

*** The older you get, the lonelier you become. That is not because you become anti-social. It is because your friends die.

Your editor is only 61. He is not a particularly ‘social’ fellow. His wife thinks he is a curmudgeon, because he does not tarry at cocktail receptions or join in Super Bowl parties. He rarely stays up after midnight; and has never heard anyone say anything after the midnight bell that was worth staying up for. And to make it worse, he is an economist of the finger-wagging, I-told-you-so school.

A man of this sort does not accumulate many friends. So when he loses one, he feels like a bum whose last quarter rolled down a storm drain.

On Monday, we went to a funeral for a dear friend, Frank. The service was held in an old and beautiful church in the heart of Paris, St. Julien Le Pauvre.

"Isn’t that just like Frank," said a fellow mourner. "He couldn’t even be buried like everyone else."

Frank was Catholic. "Not to believe would be vulgar," he said after receiving last rites.

He chose St. Julien le Pauvre for his funeral service because it is a Catholic church, but it is also much more than that. It is in the hands of a sect we had never heard of - the Melkite Greek Catholics. The group comes from the Near East, with its headquarters still in Damascus, and now has parishes all over the world, with an important cathedral in Roslindale, Massachusetts. It claims descent directly from the apostles Peter and Paul, but through a long and twisted lineage, threading itself through the history of the Levant. Melkite Christians are the product of an old schism. They were part of the Eastern Empire and subject to the authority of Constantinople for centuries. Then, the Moslems took over...adding Arabic flourishes and poetry to the Melkite rites. Later, the Melkites joined with the Roman Catholics, to which they remain united.

Frank was an architect. The last time we saw him - when he was already feeling the heavy hand of the Reaper on his shoulder - we talked about building. We told him about our project at the ranch in South America, where we are planning to build, by hand, a vaulted ceiling out of local stone and adobe. It is fairly easy to imagine it, but very difficult to figure out how to build it in practice. How do you frame it up so that it is rounded in the right places...and intersects a different curve going in the other direction?

Frank had done a vaulted ceiling himself, in stone, in a house he built with his three sons. If he could do it, we reasoned, we could do it too. But Frank was an architect; we are only a feral economist.

Frank took us over to the basement door. Leaning on a cane, he invited us to go down and have a look. We saw what he had done, like a wine cellar with a vaulted roof. It was not exactly what we had in mind, so we explained and Frank took out paper and pencil to instruct us. Still it was difficult to grasp the intersection of the two curves, at a 90 degree angle one to the other, from his drawing.

"I need to see this in stone in order to understand it," we said.

"Don’t worry, you’ll see it soon enough," he said.

"What do you mean?"

"Just keep your eyes open."

Saint Julien is a marvelous old church, built in the 13 th century. It was built and rebuilt and built again, according to the history books. But in the 13 th century, the present shape took form.

Then, as recently as the 1920’s it was the scene of an important event in the art world. It was where Tristan Tzara, Andre Breton and Philippe Soupault staged the last major "Dada excursion." The Dadaists shouted to passersby a stream of idiotic and absurd remarks. But that was the idea, to stir up interest in the absurdity of life itself. It was a form of marketing, designed to raise the public’s awareness of Dada and perhaps give the artists more street cred. It failed. The public ignored them. Breton and Soupault then split off from Tzara and formed the surrealist movement.

Frank had little interest in the Dadaists. As far as we know, he had no particular interest in the Melkite schism either. It was the building itself and the richness of the ceremony he admired. The church is built entirely of stone. It is small, intimate, with an ornate wooden panel that embellishes the sacristy in front of worshippers. On the walls hang religions paintings and icons in the Eastern Orthodox style. The priest was decorated in the Eastern style too. Though not Orthodox, he would be easily mistaken for one of that ilk, with a black head cloth stretched over a flat rack on the top of his head, falling gracefully to his shoulders and down his back.

The service began with chants and a sung Greek liturgy. It had the flavor of monasteries, minarets and strong coffee... At times, the words were clearly French. At other times, we weren’t sure. There were the usual bible readings...and a homily from the priest.

We were lost in thought...mostly remembering Frank and wondering why we had seen so little of each other in the 30 years we had known each other. Frank was a much more reflective man than we are. We write. Frank thought. And when he talked, we listened carefully. Because his thoughts were not the rough brew of columnists and pundits. They were the distilled spirits of the serious thinker. Rich. And strong. Often, when we were considering a subject, we would ask ourselves... ‘What would Frank think of this?’

Now, it is too late to ask him. We’ll have to think for ourselves.

As we were thus occupied with our thoughts, our eyes rolled upward. There were columns running down both sides of the church, spaced about the same distance as those we intended for our project at the ranch. We followed them up to where they branched out, expanded...and vaulted over the ceiling. And yes, there were the criss-crossing supports...the frame on which to rest our ceiling...and the angles, formed naturally by the intersection of the two vaulted sections...just as we had imagined it.

Our mouth was open. We tilted our head upward. We studied the ceiling. And we thought we heard a voice whisper: ‘just open your eyes.’

Adieu, Frank.

Bill Bonner
For The Daily Reckoning