BRICs collapse: A devastating sign of things to come?


Remember the BRICs? Those rosy investment havens of just a few years ago, you know, the ones that defined the word globalization?

UCAffiliateCreativeRemember how investors tied their portfolios to the coat tails of Brazil, Russia, India, and China? These emerging markets were initially fueled by a cycle that shipped vital commodities like oil, agricultural products and minerals to the manufacturing bases, mostly in China but increasingly in India.

Then when that ran out of steam, credit took over. In part this was driven by governments in the developed world who adopted expansionary monetary policies, and as the markets showed, another contributory factor was the pressure from international investors to find yield.

Both of these cycles worked for a while. There are massive capital flows to emerging markets. This allowed the local banks to loan out a great deal of money, which in turn led to a growth in home ownership, consumer confidence expressed in purchases of household goods, cars, foreign travel, etc. Many millions of people moved from being a producer to a consumer for the first time.

Now this credit growth, too, has stalled.

As Bhanu Baweja, the Investment Bank Head of Emerging Market Cross Asset Strategy at Swiss bank, UBS comments:

“Emerging markets have not delivered the diversification we thought they would. Balance sheets are deteriorating” and “policymakers are finding it hard to get their house in order. As the downgrades come and the credit spreads widen, the medicine is going to get more bitter.”

India has seen its growth rates fall as it becomes a victim of the international trade relationships between producer and consumer nations. It also needs to address some internal reform issues and to recover form a terrible monsoon season.

China is now shaky. Its equity bubble has burst. The government is not looking quite so clear-sighted as it did and the world is concerned it might retract back, leaning on  its heritage as a centralized economy.  The recent visit of the Chinese premier was a calming mission on China’s part. It is seeking to reassure the West that they have things under control. But do they?

Brazil and Russia have both sunk into deep recessions. Russia is suffering from the dramatic fall in oil and gas prices and has been a wholesale victim of the global commodities retreat. It is also encountering geo-political problems with former Soviet states like Ukraine.

Brazil has had its debt cut to junk status by Standard and Poor’s. Its economy was slammed by the double whammy of a commodities crash and its Petrobras corruption scandal. It’s now in the thrall of a deep recession and Dilma Rousseff, Brazil’s president, is about to embark on a massive round of austerity, cutting spending and imposing taxes.

The downturns of the BRICs opens the possibility for a global slowdown. The engines of the boom are slowing. Debt sustainability is weakening in the lesser emerging markets of Turkey, South Africa and Malaysia.

Of all of these markets, Brazil particularly demonstrates the problems of the developing world as it struggles to cope with a huge deficit, a dependence on commodities, and a shaky political situation.

These are factors we can recognize from our own shaky economy. We must remain vigilant. Our economy is incredibly fragile. A tiny tremor could send us back to the sub-prime nightmare of 2008. Our deficit is $17 trillion. Government spending, especially on welfare programs, is on a steep upward trajectory. Our best efforts to profit from the collapse of the BRICs is slow going. The Fed is sending conflicting messages on the interest rate.

Tiny Squirrel

The squirrel says: Whatever form an economic collapse might take, we will all need the basics: food, water, barterable goods. Whether you are a millionaire with a mountain top bolt hole, or a retiree with a small home, we can all take steps to protect and defend out future.  Now is the time to consider alternate investments. Look at tangible assets, like real estate (but only if you can buy outright.) Stock up on food, alcohol, some tobacco, ammunition and other traceable assets. Acquire liquid — and universally acceptable — monetary instruments such as cash and non-fiat currencies like gold, silver and bitcoins. Build a stockpile of medicine and fuel.