The Broken BRIC Revisited

by: Carlos X. Alexandre

Recently Patrick Chovanec, one of the few bright guys in the room, wrote the article “China: Initial Thoughts On PBOC Easing,” and a clever statement stood out.

The problem is that China wants a correction without having a correction.

A day doesn't go by without a contrarian view of the the BRIC economies, although being a contrarian actually means seeing the facts for what they are, not wishing upon a star. And well wishers with extremely weak arguments are a dime a dozen. The argument against the BRIC takeover of the world economy is quite simple. Every single country within the acronym lacks domestic consumption and is at the mercy of the developed world.

China is constantly covered only because people still believe that the country has a magic aura that protects it from reality. But the others – Brazil, India, Russia – capture the imagination a bit less. In addition, let’s keep in mind that the BRIC story is also a commodity tale, and the signs that get sprinkled throughout the vast number of economic headlines are not encouraging.

But Goldman Sachs “says commodities may rally in 2012 as Brent surges,” according to Bloomberg, and based on the forecast that the “global economy avoids recession next year and in 2013.” Considering the known facts, that’s a long shot.

Goldman’s bullishness contrasts with the view from JPMorgan Chase & Co., which cut commodities to “underweight” on Nov. 22 citing policy failures in the U.S. and crisis-hit Europe. Data today showed manufacturing in China, the largest user of energy and base metals, shrank for the first time since February 2009.

For instance, Cargill, the agribusiness giant and one of the world’s largest privately held corporations, as well as a good barometer for the commodity world, announced job cuts to the tune of over 2,000 (1.5% of workforce) as a result of a weaker global economy, according to the Chicago Tribune.

The company said the workforce reductions were made on recommendations from various business units and was not a "uniform across-the-board" cut. Cargill added it was making internal structural changes, following a review of its global energy, transportation and metals operations.

As yet another example, iron ore, a Chinese favorite, is facing slumping demand after a seasonal price jump, as reported by Bloomberg.

Iron ore, which has surged 24% this month, may resume a decline as steelmakers in China, the world’s biggest consumer, restrict output due to falling demand, according to Peter Arden, an analyst at Ord Minnett Ltd.

As reported by Bloomberg, “India’s Economy Expands Least Since 2009 as Fastest BRIC Inflation Bites.”

“High interest rates, uncertainty about reforms, allegations of corruption and recessionary global conditions are casting a deep shadow over India’s growth story,” said Rohini Malkani, a Mumbai-based economist at Citigroup Inc. “What is worrying is that growth prospects do not seem sunny for the next year either.”

In addition, protectionist forces are already in play, as indicated by Bloomberg's article “India Halts Wal-Mart (NYSE:WMT) Entry Amid Protests.”

The government faced resistance to its decision to allow foreign direct investment in multibrand retail from two coalition partners, opposition parties and traders, who say the move will wipe out the jobs of small shopkeepers.

Brazil has its own set of issues, and the anemic GDP growth of 2.1% is leading the central bank to cut rates while inflation has been above the 6.5% target since April. As Bloomberg reported, the rate cutting will continue.

Brazil’s central bank signaled it will keep cutting interest rates at its current half-point pace as it tries to prevent Europe’s spreading debt crisis from stunting growth in Latin America’s biggest economy.

Russia kept rates unchanged only due to capital outflow risks, and Bloomberg added a report on the subject.

The government of Prime Minister Vladimir Putin, who plans to return to the Kremlin next year, has been battling to staunch capital flight that may reach $70 billion this year, compared with a previous forecast for $36 billion of outflows, according to the central bank.

Interestingly, the capital flight topic keeps surfacing, and that is the true game changer that is on Europe’s front burner. Around here, the U.S. enjoyed a few inspiring economic data reports which some view as proof of a recovery. I believe that they’re nothing more than components of a stabilization process that will continue to find its footing and will extend to the end of the decade. When I take a step back and look at the forest of debt, both public and private, the so called “deleveraging” cannot happen overnight.

Finally, the political risk is manifesting itself in unexpected ways, and the recent protests in Russia following the elections highlight the popular discontentment as a result of softer economic times, while considering that Putin was viewed as the master of the universe when the good times rolled. From Reuters:

Hundreds of people took to the streets of Moscow for a second successive day on Tuesday to demand an end to Vladimir Putin's 12-year rule, defying a crackdown by tens of thousands of police reinforced by crack Interior Ministry troops.

China is getting ready to handle new waves of protests as well, a fact that should not go by unnoticed, and the Financial Times had an article titled “China to prepare for social unrest.”

Country’s security chief urges local officials to do more to prepare for the "negative effects of the market economy."

Furthermore, Bloomberg reported that “Shanghaied Home Buyers Turn Protesters as Shattered Dreams Vex Government.” That’s only one story that will repeat itself many times over, in addition to the pressure from “real” unemployment.

On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20% of the value of his three-bedroom unit overnight.

To magnify the issue, the real estate debacle affects not only the buyer, but multiple generations in most cases, adding to the rank and file of future protesters.

“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it.”

But I shall not forget South Africa, the “S” in BRICS and yet another economy that hinges on commodities. Saudi Arabia would also qualify since both have experienced about the same growth rate and are slightly larger than Greece. But why stop there? Let’s add Uruguay, Colombia, Kazakhstan and Slovakia. Bloomberg reported that “South African Economy Expands Less Than Forecast at 1.4%.”

South Africa is struggling to meet employment and economic growth targets as the debt crisis in Europe, which buys about a third of South African manufactured goods, pushes that region close to recession.

One fact will hold true: The BRIC economic strength often mentioned is only as strong as the West’s appetite.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.