Buy Emerging Markets...Once Again With Feeling
Choir…meet your Preacher.
I’m not here today to tell you anything new, but merely to reinforce what you already believe…to reinforce a good habit. The good habit is this: Investing in the Emerging Markets. It’s like flossing…or exercising; we all know we’re supposed to do it, but most of us don’t do it enough.
This discussion about Emerging Markets is essentially one of analyzing the risks you wish to take and the ones you don’t. If you were a young, heterosexual male, for example, you might be willing to risk missing a new episode of The Simpsons to risk going on a date with Megan Fox. On the other hand, you might not be willing to tightrope across the Grand Canyon to have lunch with the cast of Cats.
In the same way, there are rewards you want and ones you don’t. For example, you probably wouldn’t be too thrilled to receive a trophy for bushiest eyebrows, shiniest bald spot, most exotic melanoma or most obnoxious in-laws. By winning an award like that you have already lost. In fact, you’ve lost just by virtue of being a contender!
Choose your risks, and be sure that the potential rewards are commensurate with those risks.
Any wheat farmers in the room?…No one?
Okay, well then imagine that you are a wheat farmer. Would you rather be the best wheat farmer in Antarctica…or the worst one in Kansas? Investing in the Developed World often feels like trying to grow wheat on an iceberg, while investing in the Emerging Markets more often feels like growing wheat on a fertile prairie. So I’m suggesting that you try to grow the wheat where it will grow.
The question comes down to choosing your risks…really choosing them, not simply accepting them.
You should be asking yourself continuously, “Am I getting paid adequately for the risks I am taking?” This seems like an obvious question. But often, it is not.
Another way to frame this question is to ask: Who’s getting paid better? The guy who’s flipping hamburgers at $10 an hour? Or the guy who’s flipping hamburgers at $12 an hour…with a grizzly bear in the kitchen?
In the Developed World, the Welfare State is ascendant. Meanwhile, capitalistic elements – the things that made this country great – are having a hard time. In many parts of the Developing World we have the inverse situation, where many of the impediments to capitalistic enterprise are falling away.
In a his essay “Emerging Markets: Working Hard While Others Hardly Work”, Bill Bonner addressed this phenomenon. He’s been talking a lot about “Zombie Nation”…and how the United Stats is becoming a Zombie Nation.
“The trouble with zombies is that they’re expensive to maintain,” Bill observed. “Which is to say, the welfare state works fine as long as there’s enough money to keep the zombies happy. But when you get too many zombies…and not enough money to feed them properly…you’re in danger. Well, the welfare state itself is in danger.
“We’re not saying that everyone who loses his job becomes a zombie. But that’s what makes this Great Correction actually worse than the Great Depression of the ’30s. There were fewer zombie support systems back then. So people HAD to work. And they did. They worked on farms. And then, when the war started, they worked in factories.
“The point is, they couldn’t become zombies because – even with all Roosevelt’s efforts to create a zombie economy – there just wasn’t enough money to support them.
“This is, of course, why there are so few zombies in the emerging markets too. Not that there aren’t a lot of people who would like to be zombies… But right now, the emerging markets are still too poor to be able to afford a large class of leeches.”
Hence, we have this dichotomy opening up. In the US we are trying to work through the legacy of accumulating lots of debt. Consider this lamentable fact: 14% of all residential mortgages are either in delinquency or foreclosure.
That’s just one part of the problem. Commercial real estate loans are in a similar state of distress.
At the same time, US government spending is going up and up. Not the trend you want to see.
So let’s play a little game…
I will hand out $5 for every right answer. But anyone who gives the wrong answer will owe me a drink. So we’re going to find out at the end of this game whether I’m going to be drunk tonight…or just a little bit poorer.
I’m going to show you budget and economic growth data for five different countries. For each country I’m going to show you the most recent government deficit, total GDP and annualized GDP growth for the last three years.
The floor is open.
“E is the US,” one attendee blurts out.
“You are correct,” you editor replies. “Here’s five bucks.”
“B is Germany,” another attendee yells out.
“Nope,” your editor replied. “You owe me a drink…. Anyone else?… C’mon, drinks aren’t that expensive… Okay, well, since no one else wants to hazard a guess, I’ll tell you the answers… ‘A’ is Brazil, ‘B’ is Norway, ‘C’ is Chile, and ‘D’ is Spain…horrible, horrible Spain. See how bad Spain is? But guess what? ‘E’ is worse.”
When you consider data like these, the distinction between “Emerging” and “Developed” blurs…or becomes completely irrelevant. So we investors are left to decide whether we should stick with the familiar “safe” risk or the unfamiliar “risky” risk.
Charlie Munger, the Vice-Chairman of Berkshire Hathaway says, “One thing about accounting, the liabilities are always 100% good.”
And this observation will be true here in the Western world as well. We will have to deal with our massive liabilities, somehow, some way… They won’t go away.
Maybe we deal with them by printing our way out of it, but they’re going to stick around for a while; they’re going to be a burden; they’re going to be a tax on national productivity.
To be continued tomorrow…