BRIC By BRIC, The Emerging Markets House Being Dismantled

Includes: BKF, EEM, EWZ, FXI, INP, RSX
by: Carlos X. Alexandre

Despite claims to the contrary, BRICs are not self sustainable, while Europe's financial and economic woes are far from resolved, and America's debt crisis is still building up. The trouble is plastered all over the news, although one must read between the lines. The simple economic global reality, as it stands, was already illustrated by a graphic included in the article "The New World Order That Never Was," which in simple terms illustrates the BRICs lack of self sufficiency. Since then, plenty has transpired, but a macro view of the condition by Andy Xie adds an interesting perspective, and while the U.S. and Europe rode the debt horse and fueled consumption, all was well.

In the dollar bear market of the past decade, the BRIC countries (Brazil, Russia, India and China) have been the darlings of international speculative capital, like Southeast Asia 15 years ago. Even though they have little in common, just a phrase has launched numerous funds in their name. Whenever there is a hot concept like BRIC, there is a bubble. There has never been an exception. The BRIC countries exhibit all the symptoms of binging on cheap credit: high levels of indebtedness, inflation and strong currencies. In the past decade broad money has risen by 17.2% per annum in India and 18.2% in China, while their real gross domestic product rose by 7.5% and 10% respectively.

Just last month, Reuters reported that "India's finance minister is putting welfare, defense and road projects on the chopping block in a last-ditch attempt to hit a tough fiscal deficit target by March, risking short-term economic growth and angering cabinet colleagues." In addition, desperation always forces otherwise protectionist countries to attempt to attract foreign investment when the going gets rough, and in December 2012 the Indian government "won a vote in the upper house of parliament on allowing foreign supermarkets such as Wal-Mart Stores Inc to set up shop in India for the first time." The problem with the tactic is that it's usually too little, too late, and this month India "projected economic growth would be the weakest in a decade."

Brazil, much like everyone else, is looking to government stimulus to address the economic slowdown, and in December 2012 the government "geared up to prolong stimulus measures as President Dilma Rousseff seeks to revive an economy that remains stagnant despite more than a year of tax breaks, interest rate cuts, and other efforts to jumpstart growth." What's missing? A domestic market. Meanwhile, government fiscal targets are not being met, while President Dilma Rousseff subscribes to the idea that politicians know best.

Stavanger, Norway-based investment fund Skagen says it has lost about $200 million since August because of Brazilian President Dilma Rousseff's latest intervention in her country's economy - a plan to force companies to slash electricity rates. Rousseff says the plan is needed to cut costs for Brazil's struggling factories and other consumers. The collateral damage has been huge, as the prospect of dramatically lower profits has wiped more than $15 billion off the book value of Brazilian power companies, including Eletrobras, in which Skagen holds a large equity stake.

But it gets better, because Rousseff has big plans and "this year she plans to loosen decade-old rules on public spending ensure that benchmark rates stay at their current record low of 7.25 percent, even if the economy accelerates; pressure banks into lending more; and force investors to accept lower returns on infrastructure projects and other investments." Where have we heard that story before?

Russia is still dominated by Putin, the macho man, and he's so committed to the people that he often gives his shirt off his back, literally. He "Backs Efforts to Compel $1 Trillion Repatriation," as reported by Bloomberg in December of 2012.

Clawing back assets amassed by Russians in low-tax foreign jurisdictions is central to Putin's plan to reignite and diversify the sagging economy through investment. The government this week cut its growth forecast for next year to 3.6 percent, less than the "minimum" 5 percent to 6 percent Russia needs over the next decade, Putin said.

China continues to play the shell game, and is also opening up to the world. "China scrapped a ceiling on investments by overseas sovereign wealth funds and central banks in its capital markets, part of government efforts to encourage long-term foreign ownership and shore up slumping equities." Meanwhile, there's the opinion that "China Misses 'Hard Landing' as Government Spends, Li Daokui Says," although building roads to nowhere continues to be bad policy.

Li Daokui, an economist at Tsinghua University who was an adviser to the People's Bank of China from 2010 to 2012, said in an interview with CNN that China's decision to speed up construction projects kept its rate of growth from slowing more than it did.

However, and keeping in mind Li Daokui's words, "China averts local government defaults," according to the Financial Times.

Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012, an indication of the immense challenge facing China in working down its debt load. Local governments borrowed heavily from banks to fuel China's stimulus program during the global financial crisis and are now struggling to generate the revenue to pay them back, a shortfall that could cast a shadow over Chinese economic growth.

Thus it is not surprising that the "US Conference Board fears Brics miracle over as world faces decade-long slump," and "the catch-up boom in China, India, Brazil is largely over and will be followed by a drastic slowdown over the next decade, according to a grim report by America's top forecasting body." I have no fear, but rather certainty that the party is over. However, Jim O'Neill stated in October 2012 that "the next decade, as he defined it, will be about China becoming "more like us" - boosting consumption, exporting less - and the UK becoming more like China." For cultural and sociopolitical reasons, it will not be so, but O'Neill has now retired and I don't know if there will be a follow-up opinion. In addition, Goldman Sachs (NYSE:GS), Mr. O'Neill's employer, took the unusual step in October of 2012 of filing with the "Securities and Exchange Commission detailing plans to shutter mutual funds focused on stocks in two of those countries: Brazil and India."

One thing I do agree with is that another decade will be required to weed out the global economic problems and start rebuilding, and that's already taking into consideration that politicians of all stripes will do anything in their power to kick the proverbial can down the road, only because human behavior is too predictable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.