Markets

Things That Are More Important Than Facebook

May 30, 2012

3 minute read

by Finance Addict

Facebook is hitting new intra-day lows as I write this. And again I ask, “who cares?” I don’t mean to be unsympathetic, but I’m going to assume that anyone who bought into in Zuckerberg’s heads-I-win-tails-you-lose coming out party has only done so with money they can afford to lose. If not then I would suggest that they read this and this.

I’ve already written about two massive economic developments that are far more important: the euro’s near-death experience and the U.S. fiscal cliff. Here’s one more: the BRICs are over.

Brazil, Russia, India and China. Four high-growth and highly exciting countries whose progress the world has been tracking since 2001. The stagnant and troubled economies of Europe and the U.S. are very much hoping that the BRICs will help lead us through the valley of the shadow of death, as they did the last time. But are we out of luck?

Brazil

Brazilian automakers have had 6 months of falling car sales. It’s the world’s third-largest car market and “responsible for 20 percent of the country’s industrial economy”.
Its currency has dropped almost 15% in the past three months. This may help Brazilian exporters, but may also help stoke inflation.
Speaking of exports, Brazil’s economy is very dependent on sales of commodities to other countries. (Vale, the world’s largest producer of iron ore is a Brazilian company.) A slowdown in its customers’ economies will lead its own economy to weaken even more.

Russia

Its GDP growth remains positive but has slowed down recently (from 3.9% in March to 3.7% in April.)
Its economy is also heavily dependent on commodities sales that will suffer as one of its largest customers, the eurozone, continues its descent.
Russian politics remain volatile. Large parts of Russian society remain displeased with Vladimir Putin’s self-determined staying power and have expressed this. How will this end?
The government doesn’t have much of an issue with budget deficits, but this could change if (1) Putin pulls a Saudi Arabia and tries to buy off his citizens and / or (2) oil prices really fall off. (My emphasis below.)

Russia’s oil sector [...] pay[s] a progressively higher share of their revenues when oil prices are higher

[...]

[T]his policy has an interesting side effect. When oil prices fall, oil companies see only a very small decline in their revenues, since when oil prices are high, the lion’s share of their revenues are taxed away anyway. The flip side is that the government takes a serious hit when prices drop. (Source: Russia Behind the Headlines)

India
Serious doubts are emerging about the near-term economic future of India. Here’ what the IMF has to say:

The extent of the recent slowdown in India’s growth rate has surprised most Indiawatchers even in the face of ongoing international financial market volatility, high and volatile oil prices, and the uneven global recovery.

Why is this happening?

Foreign investment, (think of Intel, HP, GE, Honeywell, and all the other multi-nationals operating there) has slowed down dramatically.
The coalition government seems at a loss for how to deal with its problems. India, as it likes to say, is the world’s largest democracy and its great diversity is reflected in its political scene. Imagine the political gridlock in the U.S. multiplied threefold and you’ll get a rough idea of the difficulties India has in confronting tough choices.
This is especially true when it comes to corruption. India’s middle-class is sick and tired of the rampant corruption among the political and business class. The credibility of its leaders is vanishing at warp-speed. At this rate, it’s not clear whether India will be able to capitalize on its tremendous demographic dividend.

China

The brickiest BRIC of them all. Here’s the thing about China: its economic data is extremely unreliable. So any rosy pronouncements must be taken with a grain of salt. Just consider this:

As I mentioned last week, the Chinese have become extremely pessimistic about their own prospects.
History Squared also pointed out a recent Economist article which shows that China’s top politicians, i.e. the Chinese most in the know, are making contingency plans.

Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”

Europe’s a disaster, the U.S. is a question mark and the BRICs might be stumbling. Facewho?