When BRICs Crumble, Will Commodity Prices Collapse?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?

China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish

Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.

Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.

BRICS: A False Economic Dawn?

The economies of the western world are struggling to emerge from an ongoing crisis of their own governments' making. Big global investors have placed much of their hopes on the BRICS nations: Brazil, Russia, India, China, and (sometimes) South Africa. All of the BRICS face serious problems, both domestically and regionally. Is it wise to base one's investment hopes on countries which are facing so much turmoil of all kinds?

Poverty
Poverty is a dangerous problem for any country to have, as it not only prevents people from maximizing their potential, but it also represents a dangerous store of resentment and potential political instability. Poverty is a significant issue in Brazil and India, as roughly one-quarter of those populations live below their country's poverty lines.


Unequal distribution of wealth is a similar problem, and perhaps even more problematic from an investment statement as a voting populace may look towards politicians that promise to address this inefficiencies with business-unfriendly practices (as has happened in Venezuela). Brazil scores very high on lists of inequality (as measured by the Gini coefficient), and China is quite high as well (many people do not realize how poor the Chinese living in the countryside are). In comparison, Russia and India are much closer to the standards of the Western world in terms of income distribution.


Corruption
Where there are poor people and histories of authoritarian governments, there is often corruption as well. By its very nature, corruption does not usually leave a clear paper trail, so measuring it is difficult. Transparency International's Corruption Perceptions Index may not be a perfect methodology, but its insights are interesting all the same.


Brazil's ranking of 69 is too low to be seen as good, but it is the best among the BRICs - Russia scores the worst at a very low 154, while China and India come in at 78 and 87, respectively. In Russia, is not uncommon for organized criminals to own key companies (or control entire industries) right alongside government officials, while Chinese officials are often paid to look the other way when it comes to violation of laws and standards, securing contracts, or obtaining privileged access to capital or resources.


Rule of Law
The idea of the rule of law is closely related to corruption, but it in this case it refers to the clear and consistent application of laws and regulations to all parties in a country. In Russia, for instance, it is commonplace for countries that are "friendly" with government officials to get preferential treatment and for government officials to punish uncooperative companies through pseudolegal means. Although the worst excesses of Russia's erratic application of rules and laws seem reserved for internal matters (the infamous Yukos case, for instance), many Western companies like BP have run afoul of shifting rules and arbitrary enforcements.


Though not the same as rule of law, excessive rules and law can also be a significant problem. India is a good example of the inconsistencies and frustrations to be found in emerging investing. While India has a well-developed democracy, it also has a crippling bureaucracy, byzantine rules and regulations, and a depressing level of corruption (though a promising trend of improvement here). All in all, then, it is not hard to start a very small business in India, but trying to establish a large scale enterprise can be especially difficult.


Infrastructure
While Brazil, India and China are thought of as emerging countries forever putting up new buildings and public projects, Russia has the opposite perception - a country that has seen its physical and intellectual infrastructure hollowed out by the collapse of the Soviet system and the inconsistencies of government policy since then. Much of Russia's infrastructure is frankly not in the best of shape and this makes transporting goods and conducting business more challenging. Along similar lines, while Russia used to turn out large numbers of talented engineers, the university system has fallen into disrepair and disrepute and Russia is often challenged to find the motivated and talented people it needs to compete in advanced industries.


India also suffers from a very large population, quite a lot of poverty (one-quarter of its people living below the country's own poverty line), and a relatively poor infrastructure. Access to clean water and sanitation is still problematic in some rural areas, and the traffic jams and overcrowded railways are legendary. _SFGate

Sick as a BRIC

Understanding Third World Corruption: India

Headwinds for Emerging Markets

Next crisis to arise in BRICS

The Al Fin blog has devoted a lot of space to the underlying problems of China and Russia. But readers should take a good look at the article on Indian corruption linked above. Brazil is a special case, since it enjoys proximity and relatively good relations with North American markets and business. But the underlying weaknesses of Brazil should encourage caution in prospective investors. South Africa would be more properly seen as a nation being readied for a downward trajectory -- similar to Zimbabwe's -- rather than a nation of great promise.

You cannot blame big investors and analysts for trying to find economic promise somewhere in the world. That is what they do. But you cannot believe very much of what they tell you either, when being sold investments. If the governments of Europe, North America, and Oceania have killed the goose that lays the golden eggs, by chasing after energy starvation, carbon hysteria, and a false dream of perpetual affluence and security without work, how stupid is it for those same countries to expect nations which are essentially still members of the third world to bail them out of their self-made quagmires?

The king troublemaker is the US, of course. Obama's quest for infinite government debt -- underwritten by overseas investors -- is a folly of unprecedented proportions. Obama's desire to flood the US with uneducated, impoverished, poorly assimilable immigrants from the third world -- to boost his political power and that of his cronies -- is another great folly. Obama's ongoing agenda of energy starvation and the continued suppression of a wide array of potential energy sources, is another sign of an underlying destructiveness inside the US President which is disturbing. Has the US ever suffered from such an administrative agenda of apparent national suicide as this one?

The BRICS have promise so long as they are being pulled up from the outside by stronger economies which need BRICS exports. If the world's superpower and the other great markets of the global economy sink themselves via bad government, it will be no use looking to the BRICS for long term economic redemption.

More: Brazil -- Nowhere to go but down?

No Way to Pretend that this Mangy Dog is a Beautiful Princess

More... FinancialArmageddon: Not a sense of recovery wherever you turn

The global economy remains devastated, despite all popular claims to the contrary. And it is not just Greece, Ireland, Spain, and Portugal which are in trouble. The US is beginning to feel the hurt from ludicrous fiscal and monetary policies which date back to the 1970s -- but which have reached particularly destructive levels under the Obama-Reid regime. The global economy still pivots around the US economy. And that is bad news all around.

1) Existing home sales for April were down 0.5% to 5.05 million as compared to 7.2 million at the peak. Inventories of homes for sale increased to a 9.2 months, the highest since December while prices were down 5% from a year earlier.

2) April housing starts dropped 10.2% to 523,000, barely above the recession lows, and below any level prior to 2008. According to the National Association of Home Builders (NAHB) traffic of potential buyers was still extremely low. Keep in mind that this is an organization that usually puts a positive spin on any results.

3) While weekly initial claims for unemployment insurance declined to 409,000 from the prior week, the number has now been over 400,000 for six straight weeks after a period of coming in below that level.

4) The Philadelphia Fed Index for May fell sharply to 3.9, losing 39.5 points in the last two months. This is also well below the 1st quarter average of 32.9. Both new and unfilled orders dropped significantly while inventories also declined, indicating that the inventory buildup that helped support the recovery may be moving back in line with demand, which has been growing less than production.

5) Consistent with the above, April industrial production was flat. It is likely that production, which had consistently been running ahead of demand, is being reduced as inventories that were depleted during the recession have now caught up. This also may explain the higher level of initial claims.

6) The Empire State Manufacturing Survey was also down 9.8 points to 11.9, the lowest level since December. This index therefore confirms the Philly index and suggests similar lower results from the ISM manufacturing index.

7) The April index of leading indicators declined 0.3%. While one month does not make a trend it was the first monthly drop since last June, and fits in with what other indicators seem to be telling us.

8) Similarly, the ECRI Weekly leading indictor has been down for three of the last five weeks and has been about flat since mid-December after rising steadily from the recession lows. This is indicative of at least a pause in coming economic growth, and perhaps something worse.

9) April core retail sales increased only 0.2%, and were probably flat to slightly down when adjusted for inflation. Higher income from reduced social security withholding was more than offset by higher gasoline prices, tepid wage increases, high unemployment, lower home prices and recessionary levels of consumer confidence. And this is happening even before the end of QE2, which has been keeping the economy afloat since November.

10) The April Small Business Survey, after rising weakly from recession lows, has now dropped 3.1 points in the last two months. Even at its most recent high it was below any level in its history prior to 2008. Key segments that declined were plans to increase employment and capital expenditures. In addition the number expecting sales to rise also dropped.

11) In addition to the domestic concerns cited above, the global picture is also not looking too rosy. ECRI's long leading indicator of global industrial growth peaked last August at 0.7 and stood at 0.1 in March. ECRI managing director Lakshman Achuthan stated "There's a downturn in global industrial growth in clear sight". EU production fell in March and retail sales have been flat for six months. In the UK there's been no GDP growth for six months. Japanese GDP dropped 3.7% annualized in the 1st quarter and 3.0% in the 4th. Note that the earthquake occurred on March 11th, toward the end of the quarter, so cannot be fully blamed for the 1st quarter and not at all for the 4th. Industrial output in all of the BRIC nations seems to be slowing, and current monetary and fiscal policies suggest more to come.

All in all it seems to us that the odds are high that a domestic and global economic slowdown is already in place. In the U.S. the slowdown is happening with only six weeks to go before the end of QE2, a program that has been a major prop for even the tepid recovery we've undergone so far. For the stock market nothing seems to matter until, suddenly, it does. _ComstockFunds

Did you imagine that China is ready to take over as the global economy's driving force? Better think again. More here.

via EconomyWatch
Drowning in Debt: Why the economy still cannot seem to recover.

Reading the consequences of debt: The hidden taxes of debts, deficits, and a deflationary : inflationary chaos -- along with dysfunctional government regulations, incentives, corruption, and laws -- combine to crush any nascent recovery in its cradle.

But the disaster is compounded by the effect of demographics: If human capital is not growing and improving, any realistic hope of economic growth and development is delusional.

Japan is the canary in the coal mine, the early warning signal for the rest of the world, on the dangers of debt and demography. The PIIGS of Europe are following closely behind. Russia would be a global economic basket case except for Siberian wealth -- and how much longer can the bear hold on to Siberia in the face of shrinking demographics and evaporating human capital?

Will the people of the west ever wake up to what they are doing -- and allowing to be done -- to themselves? If not, what are the alternatives? Who is John Galt?