Expect Emerging Markets to Maintain Growth Rates

Obviously, China and India (for whom we coined the term Chindia) are the biggest emerging economic powers. During this current recession, Chindia still has a growth rate in the high single digits, even though their combined population is nearly 2.5 billion. It's the fastest that any region of that size has ever grown in history.

Indeed, the only times America has ever grown more quickly were during World War II. But even when the U.S. grew at a double-digit rate, it lacked the enormous population Chindia has today. Moreover, Chindia has a far greater ability to sustain its high growth rate than the U.S. had back then.

There's no way the world economy could remain in a prolonged recession that does not include a recession in Chindia. Moreover, a recession in Chindia is unimaginable.

Just consider the size of China's stimulus package – some $586 billion dollars in an economy less than a third that of the U.S.. Put in U.S. terms, it's the equivalent of a $1.8 trillion package. Consider too that China's banks have very little of the toxic assets that are clogging our banking system. That means China's stimulus dollars will be put into new loans, so they can actually do the job of stimulating growth. No economy has ever received this much stimulation outside of a state of war.

On the other hand, the U.S. money supply actually fell last week. Over the past 3-6 months, our money supply has remained basically flat despite a huge increase in the monetary base. This tells us that, while there's plenty of money available, banks are scared to lend it.

Furthermore, China's per capita consumption remains far below the worldwide average and is extremely small compared to that of the U.S. This implies that China can maintain its high growth rate for many years to come before its market becomes saturated with the consumer products even poor Americans now take for granted.

For instance, while stocks and commodities seem to have moved in lockstep over the past few months, commodities have outperformed stocks. This is unusual behavior in a recession, where one would expect falling demand for commodities.

The commodity index we put most store in, because leverage and speculation have little effect on it, is the Raw Industrial Commodity Index, produced by the Commodities Research Bureau. The index tracks the prices manufacturers pay other companies for raw materials. The index we follow excludes oil but includes commodities so basic most people never think of them – things like copper, scrap steel, tallow, cotton, rosin, rubber, etc.

The Raw Industrial Index, over the past six months or so has risen 26%. Not since 1973-4 has this index risen so much over such a short period of time. In fact, even in 1976, when GDP growth reached 5% annually, the rate of change for these commodities never exceeded 16%.

For commodity prices to be rising so quickly, commodity consumption also must be rising. This does not seem to be the result of speculation or stockpiling. Nor could this demand be coming from the U.S., for reasons we've said. More likely, this is totally the result of rising consumption in China – which will be sustained thanks to China's immense stimulus efforts.

So we can agree with the deflationists that the U.S. economy will grow very slowly for some time. But at the same time we're pretty certain the Chinese economy will grow very, very quickly.

India's growth is also very strong. Measured in terms of purchasing power parity China and India combined equal the size of the U.S. economy. Consequently, slow U.S. growth seems unlikely to keep the global economy down for long.

That's great for the world, bad news for us...

21ST CENTURY INVESTING

It seems the U.S. consumer will pay the price for worldwide economic growth, in the form of higher prices. Nonetheless, there is an upside for investors.

Companies with stakes in emerging economies, including Chindia and others which are conducting economic stimulus should outperform over the next few years.

Among our growth recommendations, we've featured Intel (INTC), Apple (AAPL), and Roche (RHHBY.PK) (which also surprised on the upside, due to its major interests overseas). Coca Cola's (KO) revenues also exceeded expectations, though the company suffered a little from currency exchange recently. Actually, we have very few stocks in our portfolio right now that operate solely in the U.S. We want to get in on the world's major growth spots, and the U.S. market doesn't make the list for now.

As we mentioned above, today's emerging markets have the ability to sustain their high growth rates for the foreseeable future. They are playing catch-up, after lagging for so many decades, which means they will simply run faster than anyone else.

We've talked in past updates about China's escalating car sales. Can you imagine U.S. car sales ever rising by 25% a year? Impossible. Yet that's the rate in China, and it could easily remain that high for many years to come.

In the end, Americans may enjoy the worst of both worlds. We may suffer weak growth at home, while experiencing inflation as a result of global growth. A few years ago, nobody would have believed that, with an unemployment rate of 9.5%, commodity prices would rise 26%. But that's life in the 21st century.

Comments

[Drew Arnold:]

Good article, but two points:

1.) "For commodity prices to be rising so quickly, commodity consumption also must be rising." Is this necessarily true? Certainly not with regard to long-term demand. To me it seems that such a quick rise in commodity prices would have to be attributed to something more temporary, such as Chinese stockpiling (which we know is happening) or the infrastructure projects in the Chinese stimulus program. Neither of these will provide "sustained" demand for commodities.

2.) "China's stimulus dollars will be put into new loans, so they can actually do the job of stimulating growth." China's "stimulus" lending practices will likely be looked back upon as a mistake. As we know, China has required state-run banks to lend excessively, which will lead to a large number of non-performing loans down the line. It may also lead to bubbles in asset prices, which it has seemingly already done with stocks and real estate. Even the Chinese government has admitted to this and has recently requested that banks follow the loans they make and ensure that they are not contributing towards inflated asset prices. These lending standards have led to short-term stimulus, but could easily lead to some big long-term problems.

Jul 28 11:53 AM

[Susan Weerts:]

"China's per capita consumption remains far below the worldwide average and is extremely small compared to that of the U.S. This implies that China can maintain its high growth rate for many years to come before its market becomes saturated with the consumer products even poor Americans now take for granted."

China's Per capita income remain relatively low among the worldwide average. Even with the 2nd biggest GDP in the world, China's GDP per capita rank 104 in the world, right in front of Iraq.

Chinese have to save for health care, retirement and various self-insurances American takes for granted.

Jul 28 12:19 PM

[Joseph L. S...:]

I imagine you have a number of “firsts” to your credit, but I wonder if you can fairly take credit for the term Chindia. (In your first sentence above “…we coined the term Chindia.”) In 2005, Jairam Ramesh, an Indian journalist and later politician, began using the term and on April Fools Day, 2006, his book, “Making Sense of Chindia” was published – followed by a spate of others with that title. If you used the term in print before then, I suggest you get a share of Mr. Ramesh’s royalties!
Best regards, JS

Jul 28 12:59 PM

[Dr. Stephen...:]

As a matter of fact TCI Enterprises LLC best known for my publication The Complete Investor trademarked "Chindia" on October 15, 2004. It can be easily verified by searching the United States Patent and Trademark Office's website. 78500658.

Jul 28 01:39 PM

[Living4Divi...:]

That's a great term, Chindia, Dr Leeb. Kudos to you.

Too bad you didn't patent "Chimerica" (or did you get that one also?)


On Jul 28 01:39 PM Dr. Stephen Leeb wrote:

> As a matter of fact TCI Enterprises LLC best known for my publication
> The Complete Investor trademarked "Chindia" on October 15, 2004.
> It can be easily verified by searching the United States Patent and
> Trademark Office's website. 78500658.

Jul 29 08:15 AM

[Senthil Mur...:]

Rising commodity prices is mainly because of the demand from developing economies such as China and India. Moreover there are lot of infrastructure projects are getting underway in these countries. This pushes up the demand for commodities such as steel and iron. In next 3-5 year, China and India will be the largest market for automobiles. Putting altogether, China and India will the determinants of global economy path in fture.

Jul 30 12:09 AM