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I just returned from a quick trip to the Brazilian industrial state of São Paulo, including visits to the sprawling capital, two coastal cities, and Piracicaba — a modern, bustling town that’s typical of the fast-growing interior (where we took this picture).
When I first arrived there, I had half expected to see, hear or read about some impact on Brazil’s economy from the U.S. credit crunch.
But there’s virtually none. In fact, Brazil is booming — and it’s not alone. My team and I see parallel booms in Argentina, Mexico, Chile, Columbia, Peru and all over Latin America. Ditto for Asia, Oceania and Africa.
Would a credit crack-up in the U.S. impact the rest of the world? Of course. To think otherwise would be to ignore the linkages among global financial markets.
But my trip to Brazil has reinforced our view that three powerful global currents are likely to persist:
- The rapid emergence of new, vibrant middle classes many times larger than anything previously witnessed on the planet …
- The rapid growth of global trade between Asia and other emerging markets, which, remarkably, is largely independent of the U.S., E.U. or Japan, and …
- The nonstop increase in worldwide demand for commodities — especially food and energy.
The Rapid Emergence of
Brazil’s New Middle Class
Brazilian economists view their population as split into five class categories:
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Classes “A” and “B,” at the top of the social ladder, have traditionally made up the only consumer market of significance.
In contrast, classes “D” and “E,” at the bottom of the scale, are largely excluded from the consumer economy.
The big phenomenon in Brazil today: Class “C” or what I call Brazil’s “New Middle Class.”
These are recent entrants into the ranks of consumers — the people who, like their counterparts in nearly every major emerging nation, are transforming the world economy virtually overnight.
Veja magazine, Brazil’s leading news weekly, reports that in just the last two years, 20 million Brazilians have left poverty behind and joined this New Middle Class.
“Compared to the half billion new consumers that have emerged in China and India in the last decade,” write the authors of the Veja article, “the Brazilian phenomenon may seem small. But it is still spectacular in its own context. It’s as if two nations the size of Portugal have emerged out of poverty — an unprecedented historical event in such a short period of time.”
They remind us that, regardless of when or where, the varied histories of the world’s leading industrial nations have one unequivocal attribute in common: The rise of a large middle class.
That’s what we saw in Europe when rigid social barriers gave way to the mobility created by capitalism. And that’s what we saw again in Japan after World War II.
Now, it’s arriving in Brazil and other emerging nations: Suddenly, Brazil’s New Middle Class is the largest in the country with 86.2 million people — 46% of the total population, compared to just 34% in 2005. Meanwhile, the poorer classes, which made up 51% of the population in 2005, have now shrunk to just 39%.
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Members of Brazil’s New Middle Class buy four out of every 10 computers sold in the country. They’ve got four out of 10 of the nation’s cell phone lines. They live in 70% of the homes financed by the giant government-run Caixa Economic Federal. And they are the recipients of 70% of newly issued credit cards.
They are creating a large social buffer between rich and poor, spurring new businesses, and creating new jobs for low-income Brazilians.
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Take the Silveira family in the southern city of Porto Alegre, for example. Two years ago, they were barely surviving on a monthly income of a few hundred dollars. Today, thanks to new jobs held by 23-year-old Monique and her 22-year-old brother Fransces, their income has jumped enough to afford their first computer, DVD player, microwave and washing machine.
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Or consider Mário Pereira who, until recently, could barely feed himself selling fruits and vegetables at the Ver-o-Peso market in Belém, near the mouth of the Amazon. Now he’s landed a job as a manager at the booming nearby port, while his own, newly-hired employee keeps the stall going at the market. His total income has quadrupled, which, in turn, qualifies him for financing to expand his business.
Multiply these two mini-success stories by a factor of 10 million in Brazil alone. Then multiply them again by a global factor of several hundred million. That will give you a glimpse into what’s happening in emerging nations around the world.
In Brazil, the poorest of the poor regions are in north and the northeast. And until recently, most local stores were Mom-and-Pop shops I had never heard of. Today, they are transforming themselves into powerful regional and national chains that target Brazil’s New Middle Class.
A once-small appliance retailer by the name of Insinuante has now become a super-chain. Ditto for the relatively unknown furniture store Hermol and home improvement retailers Armazém do Pará and Cimfel. One rapidly growing drugstore chain even calls itself — proudly — “Farmácia dos Pobres” (Pharmacy of the Poor).
Established firms are also jumping in. The Swiss multinational Nestlé has just created a new product line targeted to Brazil’s New Middle Class. And Cyrela, a construction company that previously specialized in high-end homes, just announced the creation of a new unit, also dedicated to the New Middle Class. Every major company is strategizing how to best serve the New Middle Class.
But I repeat: This phenomenon is not limited to Brazil. Latin America specialist Rudy Martin sees a similar pattern all over the continent.
Larry Edelson and Tony Sagami report the same in China and India, although on a much grander larger scale.
Sean Brodrick sees its impact in every remote region of the hemisphere he visits.
Everywhere, these new middle classes are transforming the world economy.
The Rapid Growth of
Trade Between Asia
And Emerging Markets
Not too long ago, global trade deals of substance that did not include the United States, Western Europe or Japan were rarer than hen’s teeth.
Today, it’s precisely the opposite. When you read the headlines about major deals, it often seems as if the world’s industrial giants don’t even exist. Here are just a few examples from this year alone …
- China’s largest steel producer, Baosteel, has agreed to pay Brazil’s giant mining company, Companhia Vale do Rio Doce, 65% more for its iron ore.
- Three state-owned oil marketing companies in India have announced they will jointly pump $600 million into Brazil to buy or lease sugar cane plantations and related units for producing ethanol. Bharat Petroleum, Hindustan Petroleum and IndianOil will acquire a 15% to 35% stake in two of the largest Brazilian integrated ethanol players — Louis Dreyfus Commodities Bioenergia and Infinity — plus a 50% equity in new plantations projects of a smaller firm, Rezek.
- China Petrochemical Corporation (Sinopec Group) has signed an engineering, procurement and construction contract with Brazil’s state-owned oil company Petrobras to build 974-kilometer natural gas pipelines, its largest overseas petroleum engineering project to date.
- Venezuela’s state oil company PDVSA is redirecting crude shipments from the Chalmette refinery in Louisiana to Chinese oil company Petrochina. Meanwhile, Venezuela is going to build three oil refineries in China to process its heavy oil.
- Indian Prime Minister Manmohan Singh and China’s Premier Wen Jiabao have upped their 2010 target for bilateral trade between the two countries from $40 billion to $60 billion — a move which they expect will greatly boost demand for oil, copper, iron ore, soybeans and other raw materials from Brazil, Argentina, Chile, Peru and Venezuela. Just the trade between Brazil and India alone is expected to growth three-fold by 2010.
Overall, Goldman Sachs now estimates that the four BRIC countries (Brazil, Russia, India and China) will be the largest drivers of the entire world economy by 2050. That means their combined economies could be bigger than those of the United States, Western Europe and Japan.
Unbelievable? That’s what I thought 40 years ago, when demographers predicted that cities like São Paulo and Mexico City would be larger than New York or London by the end of the 20th century. They were right. And now those populations are on their way to catching up with ours in terms of buying power.
Nonstop Growth in Worldwide
Demand for Commodities —
Especially Food and Energy!
The new, burgeoning middle classes in Brazil and around the world — plus the booming bilateral trade between Asia and developing nations — are two critical pieces in the same puzzle: Surging commodity prices.
Look. These are not seasonal factors. Nor are they driven by politics, speculation or one-time disasters. They are persistent and powerful drivers of the commodity bull market that Larry and Sean have been forecasting so accurately and writing you about so persistently.
Consider global energy markets. Some still hope that alternate sources will sooner or later begin to catch up with soaring demand. But it’s too little, too late. And in one sector — corn-based ethanol — the “solution” for energy supplies has merely created more scarcity in food supplies.
Or look at global food prices. Just in the last 36 months, the cumulative inflation is a whopping 83%. And demand continues to grow so quickly that many major nations have virtually given up the idea of building emergency stockpiles.
On six continents, famers and agronomists have made herculean efforts to expand acreage under cultivation, improve yields and boost production. And they’ve actually been quite successful.
But it’s still not enough. In the most recent year-to-year comparison …
- Farmers worldwide managed to boost production by 13.8 million tons. But stockpiles still plunged by 12.4 million tons.
- Corn producers harvested a whopping 66.9 million additional tons. But stockpiles still fell by 5.3 million tons.
- Soybean stockpiles fell even more dramatically — down 14 million tons, or 22%, the largest percentage decline among all major grains.
The key reasons for soaring prices and sinking stockpiles? According to leading economists and the world press, they’re precisely the same reasons that Larry began writing you about long before they were recognized by leading economists or the world press.
So Saturday, on the plane home from Brazil, it came as no surprise when I read material in the Folha de São Paulo that seemed to be lifted straight out of his past issues of Money and Markets:
The global commodity price boom, says the Folha, is due to “the enrichment and diet changes in countries like China, India and Brazil. As their incomes grow, these massive populations can afford more proteins (such as meats), which, in turn, require more carbohydrates to produce (such as grains).”
Plus, they continued, it’s because of “the crisis of confidence in major global stock markets leading many investors to shift to commodities, driving prices sharply higher.”
They’re right. And from everything I’ve seen in Brazil — or the rest of our team has seen globally — there’s no end in sight.
Editor’s note: That’s why Larry can’t wait any longer. To jump on this massive bull market, he’s issuing his blockbuster recommendations tomorrow. So the deadline to join is 12 midnight Eastern Time tonight.
If you click here and get on board before then, it’ll be just in time to get his new recos. Otherwise, it will be too late.
Good luck and God bless!
Martin
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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