A new BRIC nation ready to pounce

Thursday, 17 November 2022 — Albert Park

[9 min read]

Dear Reader,

It was just last week when I was sitting in a taxi with my colleague and friend Greg Canavan.

We were on our way to the Melbourne Airport, having just finished a film shoot for the newly released Diggers and Drillers publication.

We struck up an interesting conversation with our driver, forming the groundwork for today’s issue.

Now, in this role, it always pays to take the time to talk to people, be it a mining executive from Perth or a retiree at the local suburban coffee shop.

We all come from different ‘walks of life’. Our careers, backgrounds, and families all amalgamate, giving us a unique perspective into what makes this world tick.

It pays to keep an open mind!

Obviously, some are more willing than others when it comes to opening up for a discussion…so it’s great when you strike up a chat with someone who’s unafraid to give you their unabridged opinion on a topic.

Which is exactly what our taxi driver gave us.

Now, this guy was a recent immigrant from India and had a lot to say about the opportunities we have in Australia compared to what he grew up with in his small town in Northern India.

He, like thousands of other migrants from India, saw BIG positives for living in this country.

From traffic laws to infrastructure, our driver seemed overwhelmingly impressed by what Australia provided…even the tolls and speed cameras that dotted the Tullamarine freeway to the airport seemed like a positive feature for him!

Now I haven’t travelled to India, but I have worked in Africa, so I appreciate what he is saying.

Lack of infrastructure, the wayward rule of law, bribery, and corruption all take their toll and hinder progress and development.

But if so, many migrants appreciate what we have in Australia, surely, they would want this in their own country too?

It got me thinking…what would it take for the world’s second-largest country (by population) to move from a vast subsistence nation into one made up of a middle-class majority, a repeat of the early 2000s China growth story if you will.

It’s been on the minds of economists and investors for decades now…India has been the big elephant in the room for massive growth yet has failed to deliver.

Despite its potential, the country consistently falls behind China and many Southeast Asian countries for growth. But could the India story finally be awakening?

India’s international population might be the spark that brings a new era of growth

With many millions of Indian residents leaving their country to chase opportunities abroad in places like Australia, Europe, the UK, and the US, it’s conceivable that these folk will expect similar conditions in their home country.

According to India’s Ministry of External Affairs, 32 million Indian nationals live outside the country, which is more than any other country.

It’s more than Australia’s entire population!

According to the ministry, every year an additional TWO and A HALF MILLION Indians migrate overseas, the highest annual number of migrants in the world.

One could look at this as a huge loss for the country, given that many of those leaving would be young, educated citizens.

In reality, though, Indian nationals are a proud lot who want to see better outcomes for their country. This is the message I get from my friends who originate from India.

Whether they move back or remain residents overseas, connections to their home country WILL remain strong. This might include business interests or regular visits to reunite with family.

Experience from abroad brings innovative ideas, technologies, and skills. All of these aspects strengthen India’s position in the global economy.

So why has the India story failed to manifest?

Some observers account government policy as the primary reason for India’s inability to demonstrate any significant growth.

You see, India has been handicapped over the last two decades by a government intent on maintaining an insular economy. Global trade has NOT been a focus for political leaders.

But those Indian nationals that moved overseas to find work could VERY well be the individuals that DRIVE major change.

A young, educated class, having gained experience across engineering, finance, accounting, and economics in top US and European firms, will be the catalyst for shifting traditional views on India’s politics and economy.

Now, I’m not saying India is about to repeat the China growth story. India is an open economy operating on free will, whereas a strict communist government has the ability to shift a nation in virtually any direction it pleases.

India’s transition toward an advanced economy will take time. Still, as a democracy, its growth is much more sustainable, likely to maintain momentum as it forms long-term trusted partnerships with Western businesses.

In fact, India has a real possibility of taking market share away from China as the West looks to divert its reliance on the Communist State.

As a young nation, India also has the potential for much longer-term growth versus China’s ageing population.

The India growth story has faded from the headlines

You might remember the ‘BRIC’ nations — which included the major developing countries, Brazil, Russia, India, and China — it was investment lingo a decade ago as people looked to jump on the emerging economy bandwagon.

High single-digit GDP growth numbers in some of these countries sparked a strong interest in BRIC ETFs.

But in reality, it was all about China — and to a smaller extent, Southeast Asia.

India was hyped but bore very little fruit.

But is this long-fabled story starting to offer tangible evidence of finally materialising?

When commentary is cloudy, I like to refer to the charts for some definitive answers.

As I’ve shown readers in the past, we can use charts to identify relative strength. I’ve shown you how mining stocks have held up well against the backdrop of major falls across all equity classes.

So, using this same idea, I’ve charted our ‘BRIC’ nations using the iShares country-specific ETFs.

Note that I’ve moved the ‘R’ out of the equation since Russian equities are as good as dead in global markets.

So that leaves us with BIC!

Each ETF is made up of large- to medium-cap companies across the respective countries.

As you can see, India is revealing some encouraging signs indeed…

Five-year ‘BIC Chart’ — Brazil, India, China

Over the last five years, the iShares India ETF has made a whopping 61% gain against Brazil and China, which have both handed investors a disappointing 7.5% loss.

While much of the outperformance has been attributed to China’s COVID lockdowns and political uncertainties in Brazil, India is nonetheless showing investors that its largest companies are performing well despite a global slowdown.

It begs the question: Is India on a path toward MAJOR growth over the coming years?

The chart is certainly signalling strong potential.

China will undoubtedly claw its way back against the BIC nations as the government restimulates the economy following COVID lockdowns.

But strong relative growth over the last five years (in India) should spark your attention as a commodities investor.

As we witnessed from the China growth story, developing nations INCREASED demand for metals — particularly the industrial types, iron ore, copper, zinc, and aluminium.

In fact, demand is already picking up.

India is now the world’s second-largest steel producer (after China).

It also posted an 11.4% increase in steel demand from April to October 2022.

With economies slowing across Europe and the US, India is bucking the trend.

According to analysts at Moody’s Investors Service, a major global player in credit ratings for corporate and government debt (emphasis added):

‘India remains the bright spot because the underlying steel demand still remains quite solid. It is one of the brighter spots when we compare with any other region, whether it is APAC [Asia Pacific Region], Europe or even the US.’

Moody’s has recognised that India was one of the few nations experiencing significant growth in 2022 (using steel demand as a metric).

This should be VERY bullish when the global economy emerges from its slowdown.

India is displaying relative strength against all other nations.

As I have highlighted to readers in the past, this is exactly why global sell-offs provide valuable insights to investors…it tells us where the smart money is flowing.

Over the last five years, mid-to-large-cap Indian-listed companies have gained more than 60% in value, as I demonstrated with the iShares India ETF.

If we correlate this with growing steel demand to support the nation’s infrastructure needs, then we have some clear indications that growth in India is REAL.

An enormous opportunity for your portfolio awaits

Most have given up on flouting India as the next major growth story. As a commodity investor, it’s time to take notice.

In an age of scarce mineral supplies, the demand for commodities is set to reach NEW extremes.

Whether it’s the new powerhouse, India, or China’s re-emergence from lockdowns, demand for metals is COMING.

But let’s not forget about the green energy transition or the US’s multitrillion-dollar push to rebuild bridges, roads, and ports across the nation.

Many demand-driven factors are converging ALL at once to make this a MAJOR era for commodity markets.

All this while investment toward finding new deposits has gradually dwindled, despite rising commodity prices.

A new commodities super-cycle is brewing, and it presents an enormous opportunity for investors…one that’s unlikely to repeat in our lifetimes.

As global mining operations suffer from lower grades and depleting reserves, critical undersupply of metals looms…just as the world sits on the precipice for MAJOR demand.

This is the opportunity I’ll be looking to take full advantage of in my role as editor of Diggers and Drillers.

Finally, after a whole heap of work, I’m delighted to say it launched yesterday.

Click here to find out more.

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

The jackals in the government….and the running dogs in the press…are gnawing on the bones of poor Sam Bankman-Fried (SBF).

It’s a great carcass; the story has all the makings of a hit movie. In fact, Michael Lewis, who does that sort of thing (The Big Short, Moneyball…), is already on the case.

The markets’ roadkill attracts vultures, too. The political reporters think SBF offers yet more proof that unfettered capitalism doesn’t work. Instead, they say, everything needs to be regulated to protect the little guys.

Here’s Benzinga: ‘Elizabeth Warren Calls For “Aggressive Enforcement” Against “Smoke And Mirrors” Crypto Industry After FTX Fiasco’:

‘She says it “shows a dire need for stringent regulations to protect consumers.”

‘What Happened: Warren cited a Wall Street Journal report on the Security Exchange Commission launching a fresh probe into FTX. “The collapse of one of the largest crypto platforms shows how much of the industry appears to be smoke and mirrors,” she said in a tweet.

‘According to Warren, the cryptocurrency industry needs more "aggressive enforcement," stating that she is going to keep pushing the SEC “to enforce the law to protect consumers and financial stability.”’

The SEC had previously pointed out that FTX was in the Bahamas, not the US. Whether any US laws were broken or not, we don’t know. But, in our opinion, US investors are indebted to Mr Bankman-Fried. He gave us all valuable lessons on how money and markets really work.

Ivy League whiz kids

We all know that a fool and his money are soon parted. Today, we look at how they got together in the first place.

And there were so many of them! The list of FTX investors is exceptionally long…and unusually illustrious. It’s a lesson in itself. From Bloomberg:

‘FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.’

These are the smartest players in the room. They have lawyers. They have researchers. They have Ivy League, whiz-kid staff who carefully research each of their investments. And now that the tide has receded, we see that these Olympic swimmers were all naked.

To give you an idea of the depth of their due diligence, here’s Sequoia Capital explaining why it had chosen to put $150 million in FTX:

‘After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too. For me, it was simply a gut feeling. I’ve been talking to founders and doing deep dives into technology companies for decades. It’s been my entire professional life as a writer. And because of that experience, there must be a pattern-matching algorithm churning away somewhere in my subconscious. I don’t know how I know, I just do. SBF is a winner.’

A deep dive? Maybe not deep enough. Still, it’s hard to imagine how researchers could have missed this balance sheet item reported by the Financial Times (FT): a ‘hidden, poorly internally labeled “fiat@” account’.

Crypto Edisons

What was that? According to the FT, there was US$8 billion in it. And if that were in our business, we’d ask the question: US$8 billion of what? But FTX’s books are so deep and murky, it will take forensic divers a long time to get to the bottom of it.

For the benefit of readers who wish to scam investors, or simply know more about how markets work, here’s the gist of the program:

When crypto was hot, money rushed into FTX like molten lava to Pompeii. Hustlers could invent a new ‘coin’. They might, say, create 10 million of them. Then, they put a few of them up for sale…and maybe even buy a few for their own crypto fund. If they bought a single coin for US$1, the presumed market value of the whole coin supply would be US$10 million.

Of course, the real value was still zero, but you couldn’t find that out until you tried to sell the coins on the open market. Then, the price would quickly crash down to nothing.

But with a US$10 million market cap for your coin, you could begin to wheel and deal, trading your coins (at US$1 a pop) for other coins…and building a portfolio of them. It was like having a stock with a very small ‘float’. A little bit of trading could dramatically move the price, even though the real value of the company hadn’t changed. And if you were really cagey, you could do the trading yourself.

Each of these crypto Edisons was playing more or less the same game. The idea was to launch one…try to get a few sales, and then pretend that the whole lot of them were worth the same amount.

Dust in the wind

And thus, do markets teach us something that may be useful: the law of declining marginal utility of money. When you have a few dollars, they may be worth X each. Flood the world with them, and the price will fall to X minus Y. Keep printing and you soon run out of alphabet; the price will go to zero. The world will then have ‘too many’ of them.

In SBF’s case, he invented two coins — FTT and Serum — and held huge quantities of them in reserve, while allowing a few out in the semi-real world to establish a market price. On the books, as of last Thursday, its Serum coin, advertised as ‘a protocol for decentralized exchanges that brings unprecedented speed and low transaction costs to decentralized finance’, was worth US$2.2 billion. By the weekend, the value had vanished. The other coin, FTT, had previously been worth — at least according to the standards of accounting in the crypto world — US$5.7 billion. Likewise, by this past weekend, investors looking for their money found only a chemical trace of it.

These two coins were the primary ‘assets’ on the balance sheet…and could be used as credit to buy more assets of similar dubious value.

Thus was Bankman-Fried’s dazzling empire built, one fizzly illusion after another. Investors, including the hot shots at the aforementioned hedge funds, were convinced that SBF and others of his ilk ‘got it’. And they wanted some of it too.

And so, they put money in. And now, the big question is: where did it go? And there’s another money lesson for us. Easy come, easy go. In two days, SBF’s fortune, then at about US$15 billion, was reduced to zero. Suddenly, Sam Bankman-Fried didn’t ‘get it’ anymore.

Regards,

Bill Bonner,
For The Daily Reckoning Australia