Crumbling BRICS

Jaswant Singh

19 March 2013

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NEW DELHIIn 2001, when Jim O’Neill of Goldman Sachs coined the acronym BRIC to refer to Brazil, Russia, India, and China, the world had high hopes for the four emerging economies, whose combined GDP was expected to reach $128.4 trillion by 2050, dwarfing America’s projected GDP of $38.5 trillion. When the four countries’ leaders gather on March 26 in South Africa – which joined their ranks in 2010 – for the fifth BRICS summit, their progress and potential will be reassessed.
The summit’s hosts have set ambitious goals, reflected in the summit’s theme: “BRICS and Africa – a partnership for development, integration, and industrialization.” They seek to advance national interests, further the African agenda, and realign the world’s financial, political, and trade architecture – an agenda that encompasses objectives from previous summits, while reflecting South Africa’s goal of harnessing its membership to benefit all of Africa.
But, while strengthening ties with African countries might seem like the kind of pragmatic development issue that should bring consensus, the seeds of doubt are already being sown. Lamido Sanusi, the governor of Nigeria’s central bank, has called for Africans to recognize that “their romance with China” has helped to bring about “a new form of imperialism.”
Moreover, the central item on the summit’s agenda, a proposedBRICS development bank,” is one that has gone nowhere at previous summits. This time, armed with a “feasibility studyput together by the five BRICS finance ministers, some progress may at last be made. With trade, both among the BRICS countries and between the BRICS and the rest of Africa, expected to increase from roughly $340 billion in 2012 to more than $500 billion in 2015, there is also much to discuss on the commercial front.
So far, the goal of “global realignmentaway from the advanced countries has catalyzed these five very disparate countries efforts to forge their own bloc. But the primacy given to “advancing national interests” has always precluded real concerted action, at least until now.
This is why the idea of establishing a BRICS development bank has taken on such importance. And the recently conducted feasibility study might spur long-awaited progress. But toward what end?

According to China’s official news agency, the development bank’s primary objective would be “to direct development in a manner that reflects the BRICS’ priorities and competencies.” Once the bank is established, a working group will be tasked with building the necessary technical and governance capacity. But this stock rhetoric fails to address the discrepancies between the BRICS’ interests, or to define the bank’s role in reconciling and advancing them.
The fact that China is already Africa’s top trading partner, for example, invites questions about the proposed bank’s potential contributions. And China’s answer – that the bank would foster the “development of more robust and inter-dependent ties between the BRICS” – provides little substance. Is the bank supposed to serve as a counterweight to global multilateral development banks like the World Bank, or to reduce American and European dominance over the Bretton Woods institutions?
Whatever the underlying objective, it must be identified, and its concomitant risks addressed, if the BRICS are to make genuine progress. For example, if the proposed bank is simply an additional funding institution aimed at supporting the BRICS’s development agenda, the participating countries’ leaders must establish how it will interact with national institutions, such as the Brazilian Development Bank, the China Development Bank, and the Export-Import Bank of India.
But the problem of aligning the BRICS’ interests is a much deeper one. Consider India’s need for massive investments in infrastructure, made evident in its just-proposed 2013-2014 budget. Some hopeful Indians see a BRICS bank as a way to channel China’s surplus funds – as well as its expertise and experience – to such investments (especially railways), as well as to strengthen Sino-Indian ties. But, given the two countries’ many serious bilateral problems, will either government really want to bind itself so closely to the other?
Likewise, it is unclear what South Africa has to gain from the BRICS. Over the last few decades, the country has used mining revenues to pave roads, strengthen law enforcement, advance education, and revitalize cities and towns. The country’s most serious remaining problemspoverty and social inequality – are unlikely to be ameliorated through cooperation with the other BRICS countries, all of which rank among the world’s most unequal societies.
Other shared problemssuch as corruption, poverty, and social underdevelopment – would be similarly difficult to address together. And it seems that the BRICS may not even be willing to try. Although Wen Jiabao, in his final address as Prime Minister, highlighted the enduring obstacles to China’s economic development (many of which its fellow BRICS share), China’s new president, Xi Jinping, insists that his country will not sacrifice its “sovereignty, security, or development interests” for the sake of more trade.
Meanwhile, Russia’s impaired democracy and resource-driven economy are a poor example for its fellow BRICS – and, in fact, could serve as a warning to the others about the risks of excessive reliance on the state. And Brazil, like India a genuine democracy, also seems sui generis. Despite the commodities boom of the last decade, its industrial output relative to GDP is no higher than it was when the effort to create a BRICS bloc began.
The BRICS’ ambitions – and the world’s expectations for them – may yet be fulfilled. But shared potential does not translate into collaborative action. On the contrary, each of the BRICS will have to pursue its goals, and confront its challenges, individually.

Jaswant Singh is the only person to have served as India’s finance minister (1996, 2002-2004), foreign minister (1998-2004), and defense minister (2000-2001). While in office, he launched the first free-trade agreement (with Sri Lanka) in South Asia’s history, initiated India’s most daring diplomatic opening to Pakistan, revitalized relations with the US, and reoriented the Indian military, abandoning its Soviet-inspired doctrines and weaponry for close ties with the West. His most recent book is Jinnah: India – Partition – Independence 

Copyright Project Syndicate -

Markets Insight

March 18, 2013 12:22 pm
Rising dollar marks big investment shift
Investors have come to regard a weak US dollar as an essential part of the low real rate, high capital flow backdrop for about a decade, but things are starting to change.

The US dollar has had a spring in its step this year, with the dollar index, a weighted composite of the dollar’s strength versus its trading partners, rising almost 4 per cent. This is likely to be the “amuse-bouche” of a more substantial meal of appreciation that could go on until 2015, marking a big shift in the investment environment.

A change in US dollar direction would be important partly because it has form. Since the collapse in 1971 of the Bretton Woods Agreement, a system of fixed exchange rates, the US dollar has been through three downwaves (1968-78, 1985-92, and 2001-11) and two upwaves (1978-85 and 1992-2001), with an average duration of a little over seven years.

The first appreciation phase helped to bring down Latin America. The second helped to bring down Asia. Despite several causes, a common factor in Asia was the desire to keep currencies pegged to the US dollar, in spite of its 50 per cent rise against the Japanese yen. During both phases, commodity prices in US dollar terms performed badly.

This time, with the yen falling and likely to drop considerably further, it is much more likely that Asian countries will lean with the yen rather than the US dollar. Policy regimes have changed, and respite from a weak US dollar will allow local central banks to unwind monetary distortions created by currency intervention funding mechanisms used to mitigate a weak US currency. But a strong US dollar is also likely to be associated with more unstable capital flows and a rise in inflation, leading to some reactive tightening of monetary policy.

Emerging markets will also be highly sensitive to the slowing trend in Chinese growth. The economy is still rumbling along at about 8 per cent, but the irresistible forces of rebalancing and other discontinuities, including those related to the environment, credit creation and public social policy, point to slower growth over the next few years, one way or another.

At the very least, China’s growth is going to become less commodity-intensive. This will have important effects on industrial and mining commodity exporters and countries, which have profited in recent years from the China effect on commodity prices.

Commodity and emerging market assets are not only US dollar- and China-linked, but have also been the object of “financialisation” in recent years, as banks created products for investors in response to the proliferation of zero rates and quantitative easing in advanced economies.

This puts the Federal Reserve on centre stage, even if its Japanese and European counterparts look committed to further significant expansion of their balance sheets. This is not to suggest any change in the Fed’s asset purchases is imminent, especially as fiscal drag continues and the unemployment rate still stands at 7.7 per cent. But the ground is starting to shift, and with it, the US dollar.

The positive market reaction to the February employment report was illustrative. But in addition to a pick-up in the hiring rate, housing and construction activity is improving, and capital spending and exports are both contributing more to gross domestic product growth.

Competitive edge is also beginning to return to the US. The current account deficit is now a manageable 3 per cent of GDP.

Exports of goods and services have risen to a record 14 per cent of GDP, with good gains in advanced manufacturing. Net energy imports are falling. And based on relative unit labour costs, the US is now the most competitive country in the OECD, except for South Korea, and making big gains against China.

If US debt and the country’s ugly fiscal politics are a negative for the US dollar, and US assets, as often claimed, the markets have a funny way of showing it.

This is not to deny the issue of debt sustainability issues from the end of this decade onwards, or the capacity of politicians to upset financial market sentiment. But for now, the US budget deficit is falling. At about 5 per cent of GDP in 2013, it will be half of what it was in 2008 and, given current laws, double what it will be in 2015.

The contrasting economic and financial conditions of the US vis a vis Japan and Europe could not be starker. The US dollar should be expected to trend higher against most leading currencies, and put industrial commodities and emerging market currencies and local debt under pressure. Some reversal of the significant diversification away from the US dollar in the past decade by asset managers, central banks and sovereign wealth funds appears justified and probable.

George Magnus is an independent economist, and senior economic adviser to UBS

Copyright The Financial Times Limited 2013.

miércoles, marzo 20, 2013




Risk, complacency, perception and gold

In one of the best presentations we have heard at a mining investment conference, Grant Williams set out his views on the global economy, perception management, risk and why gold remains the ultimate safe haven.

Author: Lawrence Williams

Posted: Tuesday , 19 Mar 2013

Hong Kong Sometimes, if one is lucky, one comes across a single presentation at a conference that makes the whole thing worthwhile on its own, and any delegate who didn’t get in to Grant Williams’ (no relation unfortunately) talk at Mines & Money Hong Kong will have really missed an analysis of the current economic situation that was brilliantly put together – and scary as hell. Forget Friedland – often put forward as the speaker people want to hear. His material is largely promotional nowadays. 
Williams, though, gets right to the nub of how fragile the current economic situation is, particularly for the saver, and how dangerous the current policies being followed by the global financial elite are for the financial well being of all of us currently and in the years ahead.

Williams concentrated on financial risk – and the perception in the markets that we are coming out of the latest stormy period, as put forward by the politicians, and that all is beginning to come right as future risk has been heavily reduced. According to Williams this perception is far, far away from the truth of what is happening out there. Now maybe this could be considered scaremongering and that things will not pan out the way he thinks they will, but if he is correct it paints a picture that everyone worried about their savings and financial future should be aware of.

Williams is portfolio manager at Singapore-based Vulpes Investment management and also puts together the must readThings that make you go hmm newsletter which puts forward his own views – and also draws on news and comment from a number of other sources as well. It is always a fascinating read and brings one back down to earth from some of the heady optimism generated by rising stock markets and a flat to falling gold price – both things which Williams believes cannot go on under the current financial scenario.

The talk was titled Risk: It’s not just a board game – and started off by pointing out that so-called risk free assets like T Bonds have been totally corrupted as such by Central Bank policies. While as recently as 5-6 years ago these were still providing real returns for savers, nowadays interest rates on these are all negative. He gave the example of someone who had saved for their retirement and amassed a nest-egg of $10 million. Back in 2007 this could have been invested in a risk free asset to earn around $480,000 a year – a comfortable amount to live on. Nowadays the real return on such an investment would be effectively $24,000 a year well below the breadline and a massive reduction in so-calledsafeincome.

What is worrying, as he sees it, is the massive complacency in the markets as people just do not understand what is happening financially, or just choose to turn a blind eye and assume everything will work out fine in the end.

He sees the risk as being greatest in Europe which, according to the politicians, has ‘been turning the corner for the past three years, but still seems to lurch from crisis to crisis with manufacturing output, particularly in the Mediterranean countries, falling and unemployment, particularly among the under 25s, reaching horrendous levels with around 50% out of work in some countries – an horrendous statistic. And the potential of what could happen in the larger nations has been set by the latest crisis affecting Cyprus which should be ringing alarm bells right across the Eurozone, with many of the EU nations on the edge of financial disaster.

Most of the political and fiscal efforts have been aimed at trying to maintain confidence in the markets, with either surreptitious, or blatant, Quantitative Easing being the magic formula to keep markets rising. But this can become a vicious cycle which commences with Fear =, moves on with QE whereby bonds are bought, yields fall keeping interest rates down, theoretically rebuilding confidence. But as the confidence rebuilds, bonds are sold and yields and interest rates rise bringing one back to the start of the cycle again.

In Williams’ view gold remains the only safe haven investment having been seen as thus for thousands of years and being the one antidote to the eventual disintegration of fiat currencies.

He also spent a significant section of his talk looking at Fractional Reserve Banking, and its inherent dangers and the parallels with Fractional Reserve Gold, where the latest moves by some Central Banks to repatriate their gold held in foreign vaults threatens to expose the proportion of supposedly tightly held gold reserves which have been leased out to the bullion banks, and then sold on many times over.

Chavez’s Venezuela was the first to take this route, but the amounts involved were small and Chavez himself not taken seriously by the global powers that be, but there is gradual agitation for other countries to follow suit. In some cases the amounts involved are small but the recent German move to repatriate 350 tonnes has really begun to raise the ante here. If the Central Banks have leased out perhaps 30% of their gold (as Austria has admitted it has done) which is profitable for the Central Banks – and even more so for the bullion banks which have bought it from the central banks and perhaps sold it out many times over under the Fractional system which pertains – it is then almost impossible for the bullion banks to return this sold-on gold back to the Central Bank which may need it to fulfil its own obligations. It only needs a spate of countries to demand repatriation of gold to really upset the apple cart here – and is also highlighted by the fact that it appears to be taking Germany 7 years to get its 350 tonnes home. 

Why? It puts the Central Banks potentially in a very precarious position and also is part of the reason it suits governments to keep the gold price under control.

But the latest situation in Cyprus, where the move is to confiscate (steal?) savers’ holdings is perhaps a step too far and could be a calamitous mistake by the Eurozone and stimulate a climate of fear among savers in other Eurozone nations – particularly those on the financial edge of which there are several. Does Cyprus set a precedent?

Which brings us full circle back to gold. The risk to cash savings and to stock holdings, is very real so Williams’ advice is to at least hold some gold.

He concluded by saying that it has never been easier to understand what is going to happen – but knowing when it is going to happen is the problem. As he sees it, it is all ultimately a question of mathematics – but timing on these things is key and when drawn on trying to put a date on the scenario by the conference moderator Williams declined. In his view fiat currencies will collapse and gold will have its day again – but exactly when is impossible to forecast.

The U.S. Housing Bubble Is Back

Mar 19 2013, 07:19

by: Ironman at Political Calculations

Has the U.S. housing bubble begun to reinflate?

In the past several months, there has been a lot of speculation to that effect, but so far, no one other than David Stockman has really come out and committed to an affirmative answer. And even Stockman didn't specify when such a new bubble in the U.S. housing market might actually have begun.

But what really sparked our interest in this topic today is the unexpected strength in the number of initial unemployment insurance claims being filed during the last several weeks, which along with the strength of the construction industry cited in the latest employment situation report, suggests that the U.S. housing industry is finally showing signs of robust growth, at least as measured by rising sale prices for homes.

Unfortunately, the apparently robust growth of housing prices in the last several months is suggestive of something other than fundamental factors at work. Fortunately, we developed an early detection method that might be used to confirm if a bubble is present in the housing market and if so, to identify specifically when it began. So, we're going to revisit the data once more to see just what might be brewing under the surface of the U.S. housing sector.

In doing that, we're going to push the envelope with our methods, as we'll be tapping new sources of data for median new home sale prices and median household incomes, in which these data items are reported monthly.

Let's get to work. Our first chart reveals the trailing twelve month average of the median sale prices of new homes sold each month in the United States from January 1963 through January 2013, as reported by the U.S. Census Bureau. The first data point spans the 12 months from January 1963 through December 1963, the second data point spans the 12 months from February 1963 through January 1964, etcetera.

(click to enlarge)

In preparing this chart, we calculated the trailing twelve month average for median new home sale prices to account for the well-known effect of seasonality in housing sale data.

In looking at the chart, certain things stand out with respect to the apparently steady long term trends that are otherwise evident in the chart. Going from left-to-right, the first unusual thing we see is the small upward bump that begins around December 1986 and ends about four years later, as a new steady upward trend takes hold. Continuing to the right, we get to the 800-lb gorilla that represents the inflation and deflation phases of the U.S. housing bubble in the form of the large lump that appears to begin around December 2003 and appears to end around December 2008. We then see a steady trend resume in the two years that follow, which is followed by what appears to be a new spike upward. Could that be a new bubble forming as so many people are speculating just based on house prices alone?

The truth is that you can't really tell from this chart. It may be, or it may not be. For example, what about that four year long small lump from 1987 through 1990? Isn't that a bubble, if only a small one, too? How come we haven't heard about any of that in the economic history books?

The reason for that analytical vagueness is that housing prices are not really a function of time, although they are often treated as if they are.

In reality, housing prices are a very strong function of income. Although other factors can and do affect them, their prices are primarily determined by the household income of those who live in them. What's more, housing prices are very linear functions of income - if you look at housing expenditures by income level, you'll find that it follows a very straight trajectory.

That linear characteristic also applies over time. Here, for example, we would expect to see house prices follow a steady upward trend as household incomes steadily rise over time. If we see deviations from that basic pattern, that tells us that something other than income is affecting house prices, which is what makes our analytical methods so effective.

Today, we'll be doing that with Sentier Research's monthly median household income data, for which we thank Doug Short for converting into nominal (non-inflation adjusted) form, which saves us the hassle of having to match the different inflation-adjustment scales used by the U.S. Census Bureau and Sentier Research.

The downside to using Sentier Research's data is that it only goes back to January 2000. To get around that limitation, we'll also be presenting the U.S. Census Bureau's annually-reported median household income data, which goes back to 1967, and which we'll use as the backdrop for establishing the long-term trends evident in the U.S. housing market.

As we did with the monthly median new home price data, we'll be calculating the trailing twelve month average for these figures as well, so they have had the same adjustment, providing as much as an apples-to-apples basis for drawing conclusions from what we find. Our initial result is presented below:

(click to enlarge)

In this chart, we're able to determine that there have been two major long-term steady trends. The first ran from 1970 through 1986, as median new home sale prices were consistently about four times (4.07X) the value of the median household income.

This trend ended when the Tax Reform Act of 1986 made it more desirable to have a large mortgage when the tax deductibility of other kinds of consumer debt was eliminated. Enacted into law on 22 October 1986, median new home prices began increasing significantly after November 1986, rising rapidly in 1987 before settling onto a new steady, long-term trajectory with respect to median household income, in which median new home sale prices averaged about 3.6X the amount of median household income. It turns out that the dip at the end of the "small lump bubble" is really the result of the recession that accompanied the Persian Gulf War following Iraq's invasion of Kuwait in 1990, which depressed housing prices along with incomes at the time.

That new trend continued through 2000, until the onset of the U.S. Housing Bubble in December 2001.

Here, after the Dot-Com Stock Market Bubble peaked as a monthly average in August 2000, large amounts of money began flowing out of the U.S. stock market. It was slow at first, as the market declined by less than 10% through March 2001, but that quickly changed as the deflation phase of the Dot-Com Bubble became much more volatile as the U.S. economy went through a period of recession.

With stock prices swinging by 10%-20% of its peak value in any given month through October 2001, many stock market investors either took their losses or pocketed their gains from the Dot-Com Bubble and exited the market. That money didn't sit around idly, as much of it went into the U.S. housing market instead during that time, which enjoyed growth despite the recession throughout 2001 as a result. The recession ended in November 2001, just as interest rate cuts by the Federal Reserve helped pull mortgage rates to their lowest level in more than a generation. November 2001 marks the true launching point for the U.S. Housing Bubble.

Afterward, housing prices began skyrocketing month after month as the U.S. Federal Reserve compensated for both the recession and the 11 September 2001 terrorist attacks by holding interest rates at levels far lower than economic conditions would warrant for a sustained period of time. Our next chart focuses more closely on the U.S. housing bubble years:

(click to enlarge)

U.S. housing prices continued their rapid ascent through September 2005, before beginning to decelerate on their upward trajectory as the U.S. housing bubble neared its peak, as the Fed's series of quarter point interest rate increases finally boosted them to levels that actual economic conditions warranted. The peak came on March 2007, after which median new home sale prices held level through October 2007. The deflation phase of the U.S. housing bubble then began in the following months, as the U.S. entered into deep recession.

The trailing twelve month average of median new home sale prices then bottomed in December 2009 before beginning to recover and rise in 2010. However, median household income continued to fall for another year, and it was not until December 2010 that a new steady, upward trend began to form in the U.S. housing market as median household incomes began to rise once again.

The new period of order in the U.S. housing market saw median new home sale prices stabilize at roughly 3.34X the value of median household income, which is fairly consistent with the other long-term periods of relative order in the U.S. housing market.

That period of order came to an end after July 2012. Beginning in August 2012, something else other than household income has begun affecting the median sale prices of new homes in the United States. Through January 2013, median new home sale prices are growing at a rate that is consistent with what we observed during the initial inflation phase of the U.S. housing bubble following the end of the U.S. recession in November 2001.

We therefore conclude that the U.S. housing bubble has effectively reignited, with a new inflation phase having taken hold since July 2012.

The question that remains to be answered is "why?" We'll take that question on in upcoming posts.


Sentier Research. Table 1. Household Income Trends: January 2000 to January 2013 (in January 2013 $$). [Excel Spreadsheet with Nominal Median Household Incomes courtesy of Doug Short]. Accessed 13 March 2013.

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 13 March 2013.

U.S. Census Bureau. Income, Poverty, and Health Insurance in the United States: 2011. Current Population Survey. Annual Social and Economic Supplement (ASEC). Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income. [Excel Spreadsheet]. 12 September 2012. Accessed 13 March 2013.