Who's Afraid Of Emerging Markets?

Who's Afraid of Emerging Markets?
By Chris Mayer

China is the new Germany.

At the end of the Second World War, Germany was an "emerging market." It was industrializing rapidly and producing brisk economic growth. Today, Germany is a mature "developed market" that grows slowly if it grows at all. Today, China is the new Germany. The industrial dynamism that produced Germany's post-war success is moving to the East…piece by piece.

The Ruhr Valley was the heart of Germany's industrial might. For more than 200 years, the smokestacks in this northwest corner of Germany pounded out the steel and iron that would form the backbone of the nation's industry. And when the war drums rumbled, these factories supplied imperial Germany with its field guns, armored tanks and shells.Prosperous communities grew up around these old blast furnaces and mills. People took pride in the stuff they could make with their hands. Tens of thousands found work in the factories of the Ruhr. Generations passed with the knowledge that their sons and daughters could make a life here and carry on the legacy of such a place. For a long time, that was the way it went.

But the winds of change patiently grind away at even the most impressive of advantages. In the early 1990s, the industrious workers of Asia powered the mortar and pestle that would crush the Ruhr's traditional way of life.

It was a slow process, but the endgame was not hard to see. While the South Koreans became the most efficient producers of steel in the world, German workers were agitating for a 35-hour workweek. While the Chinese worked all day in their mills and new factories sprouted up like spring peepers all through China, Germany increased taxes and expanded its bloated government programs.

By the turn of the millennium, no one could ignore the stark reality any longer. The mills and factories of the Ruhr started to close - forever. In his terrific book, "China Shakes the World," James Kynge tells the story of ThyssenKrupp's steel mill in Dortmund, one of the largest in Germany. The Germans called it the Phoenix, inspired by its rise from the ashes of bombing raids in World War II.

Within a month of ThyssenKrupp closing the mill, a Chinese company bought it with the idea of disassembling the entire mill and taking it to China, near the mouth of the Yangtze River. Soon after this Chinese company bought the mill, 1,000 Chinese workers arrived in Germany to begin the process of taking the plant apart and bringing it to China.The Germans got an up-close lesson in why they could not compete. The Chinese worked seven days a week for 12 hours a day. The Germans started to complain. So the Chinese, in deference to local law, took one day off.

In the end, the Chinese dismantled the mill in less than one year - a full two years ahead of the time ThyssenKrupp initially thought it would take.

When the Chinese departed, they left the makeshift dormitories and kitchens they occupied for a year neat and clean. There was, however, a single pair of black boots left in one of the dormitories. The boots carried the brand name Phoenix, which was the same name of the plant the Chinese just took apart. The boots also carried the label "Made in China." Kynge writes, "Nobody could tell, however, whether the single pair of forgotten boots was an oversight or an intentional pun."

Over 5,000 miles away, the Chinese rebuilt the steel mill exactly as it was in Germany. As Kynge writes: "Altogether, 275,000 tons of equipment had been shipped, along with 44 tons of documents that explained the intricacies of the reassembly process." Doing all of this was still cheaper - by about 60% - than building a new mill. Plus, in China, the demand for steel was such that the mill could start producing steel immediately at full capacity.

As recently as 1975, China's entire output of steel could not match this one mill in Dortmund. Now, the Dortmund plant itself stands in China. And in Germany, you have a dying industrial city, unemployed steelworkers and the scarred earth where the mill once stood. Germany is thinking of turning the site into parkland and perhaps creating a lake and marina. But as one burly steelworker says in Kynge's book: "Do we look like yachtsmen to you?"

This remarkable vignette captures, on many levels, how the game has changed. Comfortable workers in the factories and mills of America and Western Europe have no idea what they are up against. Even so, the nature of global competition keeps shifting.We tend to think of emerging markets, such as China, as occupying a place down on the food chain of the global economy. We tend to think of these places as sources for cheap labor and natural resources. But more and more, these emerging markets are home to world-class companies in all kinds of industries.

This is the thesis of Antoine van Agtmael, author of a new book called, "The Emerging Markets Century." Agtmael is the man who coined the phrase "emerging markets" to describe growing, but less-developed economies such as China, India, Brazil, Argentina, Mexico, Thailand and other places. Before him, we called these markets "third-world" - which brings to mind many negative associations. To sell the idea, Agtmael came up with "emerging markets."

I saw Agtmael give a presentation in Washington, D.C., one evening. I've also since read his new book. Agtmael spent 30 years in these kinds of markets. "I have helped IranAir lease airplanes and hire crews in Ethiopia, was involved in financing Ghana's cocoa exports," he writes, "and grew wise to the ways - many of them laughably one-sided - that developed nations interacted with what were in many cases recent European colonies."

Agtmael selected 25 companies to profile in his book. All of them exemplify best practices and are widely recognized as leaders in their industries. All of them call an emerging market home.

Agtmael writes about spending time in High Tech Computer Corp.'s research lab in Taiwan in 2005 and how "Suddenly, my BlackBerry looked like a Model T." He writes about how the regional jets we fly are made in Brazil (by Embraer). How computers are now not just made in China, but designed there. How Indian and Slovenian labs produce proprietary new drugs. And on and on it goes.

The world has changed in a profound way, but the typical investor probably doesn't appreciate this fully. One more nugget from Agtmael: In 1988, when he started his fund, there were only 20 emerging market companies with sales of more than $1 billion. Most of these were banks or commodity companies. (Overwhelmingly, they were located in Taiwan.) Today, there are over 270 companies with over $1 billion in sales, and 38 with more than $10 billion.

Many of them are high-tech companies or provide consumer products and services. This bolsters Agtmael's point that many of today's emerging market stars do not rely on cheap labor, abundant natural resources or protective government policies. Instead, they have developed competitive advantages in technology, design, logistics and other areas.

Agtmael also gives his tips for investing in emerging markets. The most important of these may simply be this: "Don't be afraid to invest in them." (Click on bold headline for complete story)

OPEC and the price at the pumps

“In the short and medium term,” says Byron King, “I expect to see OPEC nations working to stabilize the international oil market.” (Assuming, of course, that they have the ability to do so.)

“Wide swings in oil prices are not good over the long term. It is not in OPEC’s best long-term interest to damage the U.S. economy with excessively high oil prices. And it is not good for OPEC to promote a political consensus within the U.S. that leads to a firm national commitment to develop alternatives to oil dependency.

“I think OPEC will subtly attempt to stabilize oil prices very soon. There will not be any big announcements or trumpet blowing about it. OPEC is too smart and too Byzantine when it comes to important things like that. But when the OPEC actions kick in, I think that oil prices will begin to drift downward to a level near $110-115 through the summer and into the U.S. elections in November.”
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Seeing Evil: The Arms of John McCain

A brilliant piece on appeasement from the perspective of Winston Churchill in the '30's, McCain's suffering in the '70's, and modern day appeasers today.

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What Buffett is buying next...

According to those notes, in addition to Warren Buffett's usual advice to think long-term, read a lot, and take advantage of market volatility, Buffett said:

The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly.

That means "Buy China," and that's because, as National Geographic Editor-in-Chief Chris Johns wrote in a recent column, "The shock waves of its growth reverberate in every corner of the globe."

(Click on bold headline for complete story)

What's with the markets...

Quint and his Tape Talk.

(Click on bold headline for complete story)

Runnin' the numbers on Congressional Wealth

Fortune 535 has shed some light on the financial standings of our finest in Washington. It certainly looks like a congressional stay in Washington is very good for improving one's net worth.

Socks, Scissors, Paper: The Sandy Berger Caper

Stealing materials from the National Archives...and sloppy Sandy Berger is free to walk the streets? (Click on bold headline for complete story)

Enjoy the Memorial Day Weekend!

The lesser clinton reveals her mindlessness again?

The lesser clinton is completely thoughtless. Is there no filter in her head which activates before she speaks? She's staying in the race because the front runner in '68, RFK, got shot as late as June?

Why Did These Liberals Lie About Weapons of Mass Destruction?

Great review. Not to mention that If Saddam had nothing to conceal, why bluff all the way into war?
(You can click on the actual bold headline above to access the article.)

Obama criticizes absent McCain on Senate floor, McCain hits back hard

Here's the summary of the dangers in that new G.I. bill passed in the Senate. (You can click on the actual bold headline above to access the article.)


McCain..."The most important difference between our two approaches is that Senator Webb offers veterans who served one enlistment the same benefits as those offered veterans who have re-enlisted several times. Our bill has a sliding scale that offers generous benefits to all veterans, but increases those benefits according to the veteran's length of service. I think it is important to do that because, otherwise, we will encourage more people to leave the military after they have completed one enlistment. At a time when the United States military is fighting in two wars, and as we finally are beginning the long overdue and very urgent necessity of increasing the size of the Army and Marine Corps, one study estimates that Senator Webb's bill will reduce retention rates by 16%.

"Perhaps, if Senator Obama would take the time and trouble to understand this issue he would learn to debate an honest disagreement respectfully. But, as he always does, he prefers impugning the motives of his opponent, and exploiting a thoughtful difference of opinion to advance his own ambitions. If that is how he would behave as President, the country would regret his election."

Robert Hsu's Weekly Update in China Strategy

Devastating. There's no other way to describe the aftermath of the 7.9-magnitude earthquake that rocked the western Sichuan Province in China nine days ago.

The numbers are simply tragic and seem to change everyday. The most recent counts: 51,151 dead, 300,000 injured, 5 million homeless and 12 million farm animals killed. What really tugs at my heart is that much of the current death toll includes many children, and with China's one child policy, families are now mourning the loss of their only child.

Despite nearly two weeks passing since the natural disaster struck, rescue efforts continue unabated. The Chinese are persevering through this tragedy, hanging onto hope and working hard to find survivors and rebuild their lives. Much of this hope and determination is being driven by the country's leadership.

Chinese premier Wen Jua-bao, who personally led rescue efforts for the first five days following the quake, famously told rescue workers: "Even if there is only a 1% chance (of survival), we must apply 100% effort." http://asia.investorplace.com .... continued

A Senate seat's great work if you can get it.

Surely, the party "aristocracy" regrets that the voters of Massachusetts have any say in Kennedy's senate seat succession since the legislature changed the rules when JFK (Kerry) ran for the presidency in 2004.

One brilliant commenter suggested:

Kwango May 22, 2008 4:23:57 PM
Saint Theodore the Obese, evidently thinks he's a member of the House of Lords where he can assign a relative to his hereditary seat in the senate. The last I read, the people of Massachusetts have the final say on that matter.

Ted Kennedy: I'd like wife to take seat

BY IAN BISHOP
DAILY NEWS STAFF WRITER

Ted Kennedy has made clear to confidants that when his time is up, he wants his Senate seat to stay in the family - with his wife, Vicki.

http://www.ytedk.com/index.htm

It's not yet clear how long he will stay in the Senate while battling a usually fatal cancer.

http://www.ytedk.com/epilogue.htm

Cry "foul" when gas is high!

May 22, 2008

When oil prices are high, everyone who can't do basic arithmetic complains about the price of gasoline (though it's still the cheapest part of your cost of driving). Why aren't they complaining about the falling purchasing power of the money in their own pockets? That's something nobody seems to want to do right now: Criticize the Federal Reserve for degrading the currency. When the dollar falls, rising oil prices become perfectly timed fodder for politicians. The Fed scuttles the dollar, and politicians deflect criticism by going after oil companies' "windfall profits," and the average TV-watching twit clamors for government to "do something."

Well, they hear you, Amerika. Sen. Dianne Feinstein, from the People's Republic of California, wants to do something. Yesterday, she criticized oil companies for having "no moral compass about gasoline prices." - Dan Ferris with Stansberry & Associates

What's with the markets...

All this speculation of the Oil stocks bubbling over...Quint settles everyone's nerves with his Tape Talk.

Lindsey Williams and the deceit of "Peak Oil."

Lindsey Williams, former chaplain for ARCO - Prudhoe Bay back during the '70's, insists a gallon of gasoline would be $1.50 at the pump within a year IF Gull Island's capped wells in Alaska were allowed to flow.

Except for abject conspiracy, I cannot for all of me understand why our own congress refuses to allow any domestic production of oil. Am I guessing that our dependence on foreign oil is a good thing?

Please note Williams identifies capped wells already in existence as opposed to the search and destroy mission of drilling for new ones. The oil's already discovered, drilled, and piped atop what may be the largest underground oil pool on this earth. Members of our own congress know this and inexplicably deceive us while GWB shuffles off to Riyadh with hat in hand to ask the Saudi's to please pump a few more barrels per day so Americans can affordably drive to work!

This is part 1 of 8 posted below. Each of the remaining 7 are available on YouTube. I know you'll be intrigued. And maddened!

Lindsey Williams Discusses "Peak Oil"

just click on the bold headline above to link to the video.

a word about the IRS Tax Code

Let's appreciate the "observation" that the Internal Revenue Code is so complex and convoluted that nobody can definitively understand it. In other words, whatever tax return you file can be "proven" to constitute fraud and perjury at the whim of the IRS...

"Well, it's a system so utterly complex and ultimately inexplicable that half the time the tax professionals themselves aren't sure what the rules are - a system that even Albert Einstein is said to have admitted he couldn't begin to fathom. You know, it's said that his hair didn't look that way until after he experienced his first tax form." - Ronald Reagan, 1985.

Every year since 1987 Money magazine runs a contest in which 50 tax preparers complete the federal income tax return for the exact same scenario of one hypothetical family. In 1988 there were ten correct returns, in 1989 two, in 1990 one, and in 1991 zero. For the 1991 tax year the "target tax" was $26,619 - the tax amount for a correct tax return. Not one of the professional tax preparers got it right. At the low extreme, one tax preparer calculated the tax due as $16,219. She spent 25 hours on the account and charged a fee of $750. At the high extreme, another professional tax preparer calculated the tax due as $46,564. It took him 40 hours and he charged $3,000.

The contestants presumably considered themselves as expert tax preparers, and did their utmost to win first prize. They consisted mostly of professional CPAs and former IRS agents. So, if you take your documentation and files to two "professional tax preparers," one might calculate your taxes due as $16,000+, and the other over $46,000!

Which version is correct? Or, to ask it another way, which return keeps you out of prison? Which one allows you to keep what you rightfully earned? But, above all Americans, is this system acceptable?

Please consider that if you had hired any of these 50 certified tax professionals to prepare your return, the result could have been prosecution for fraud and perjury. Not one of them got it right. Not to mention that you may have overpaid your taxes.

So, when in doubt, deduct!

poor, dumb, bitter rural losers...

Obama's remarks about poor dumb, bitter rural losers "clinging to" guns and God certainly testify to the instinctive snobbery of a large segment of America's political class. (Click on bold headline above to access entire article)