Monday, April 23, 2012

Hitting a BRIC Wall

I was listening to Ruchir Sharma talking about his Billionaires Index that he created while he was speaking on Fareed Zacharia's GPS on CNN TV. I had DVRed it and was slowly watching the program during the week as I had time. Here is a billionaire's index that he created and you can begin to see the problem when you look at Countries like Russia with 96 Billionaires, then very few millionaires but with the billionaires owning 20% of the GDP of the Country. This creates a type of logjam in a country in regard to growth when something like this happens. The same to some degree is true to a lesser extent in India with 48 billionaires who control 10.6 % of the GDP of that country and even a lesser problem in Brazil which has 36 billionaires who control 6% of the GDP of the country.

Here is his Billionaires Index 2012

Country   number of Billionaires   Total net worth as % of GDP
Russia      96                                    20
Malaysia  9                                      18.3
Taiwan     24                                    12.2
Mexico    11                                     10.9
India        48                                     10.6
Turkey     34                                     7.1
Brazil      36                                      6.0
Indonesia17                                      5.0
Korea      20                                      4.0
China      95                                      2.9

So, the real point that Ruchir Sharma was making is that ALL the BRIC nations (Brazil, Russia, India and China) will have a very very hard time under these present types of conditions to get above 5% growth per year likely for the next 5 to 10 years under these present conditions unless some unknown at present variable takes place.

His other graph is what he calls the Four Seasons Hotel Index:
For a really good hotel room he compares countries
Russia      $924
Brazil       $720
Developed markets average $704
Argentina $520
Emerging markets average   $441
Poland     $271
Thailand  $234
Indonesia $230

He said that for a variety of reasons countries whose Four Seasons Hotel Index is above the $704 Developed markets average likely won't be able to sustain over 5% growth rates. Because this hotel room rate partly has to do with how much labor is in that country. The higher their labor costs are the less likely they can sustain high growth rates above 5% per year in growth because their labor costs will be too high to sell anything much to other countries while making enough of a profit to sustain a business.

Ruchir Sharma is the author of a new book called "Breakout Nations" which I believe from their conversation is about the BRIC nations. Fareed Zaharia highly recommended this book.

Basically what he is saying is that it is the end of the Business Party for Brazil, Russia, India and China because the Freaky decade of the 2000s is over and things are returning more to normal worldwide business wise. So, the time of high growth rates for the BRIC Nations is likely over for the coming decade while more traditionally normal growth rates of the past 50 years or so will tend to return. I found his methods at finding all this out sort of unorthodox but since his methods seem to work enough for Fareed to put him on his show it likely would be a good book to read if you are a worldwide investor searching for trends and for where to put your money next for the best growth.

When an economy has an average income of around 1000 to 2000 Dollars per person it can sustain a growth rate of 8% to 9%. But once that economy goes up to 6000 dollars per person per year like China now has it really cannot sustain and 8% to 9% growth rate because it at that point has become a mature economy. It will do well to maintain a 5% growth rate with per capita income above 6000 dollars a year.

Only two countries in the world have been above above a 5% growth rate for the past 50 years. They are South Korea and Taiwan. So, he considers these two countries the ongoing breakout nations of the world.

Three other breakout nations are Indonesia, the Philippines and even Nigeria, he said, that are likely to do well during the next 5 or 10 years under the present worldwide conditions. The bright spots in Europe are Poland and Czechoslovakia at present.

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