I’ve just returned from a long swim in our beautiful reservoir here in the interior of Brazil, where we’re spending the holidays.
The reservoir is a few hundred yards wide and a mile and half long, fed by sparkling spring waters and surrounded by lush woods and sugar cane fields.
Typically, I swim to the lake’s center and follow an imaginary “lane” from the dam on the north side toward the fountainhead on the south side.
Instead of counting laps, I identify familiar landmarks on the western margin — the “urucum” tree (bixa orelana), which native Indians used as a source of war paint … the 90-foot “paineira-rosa” (chorisia speciosa) with its bright, pink flowers and cotton-like fruit … plus the mahogany, the brazil wood, and the jacaranda.
Between “laps,” I rest briefly in the middle of the lake, treading water. It’s high noon, and there’s no breeze. The catfish won’t be jumping until dusk or after a rain, and the tilapia, only at dawn. Except for minor ripples, the lake is silent — the only sounds emanating from the birds in the distant trees.
Sometimes, I treat myself to a longer rest, listening for the three-note song of “bem-te-vi” or the whistle of the “sabiá.” But most of the time, I swim, and all I can hear is the rhythm of my own breathing.
That’s when my thoughts turn to the events beyond the lakeside margins — events that are rapidly transforming the balance of economic power on the planet, with yet-untold consequences for all investors.
THE RICH AND THE POOR
For hundreds of years, the world was divided into two economic hemispheres — the rich, predominantly industrial nations to the north … and the poor, mostly agricultural lands to the south.
The rich countries controlled capital, technology, and world markets. The poor had no choice but to fall in line, with little say over the world’s destiny, and virtually no chance of catching up.
Now, all that is changing.
I walk back up the hill and sit on the veranda overlooking the reservoir from on high. With my laptop, I connect instantly to the World Wide Web.
A satellite dish brings me Bloomberg and CNN International — not to mention Japan’s NHK, Italy’s RAI, and France’s TV5.
With my web-ready cell phone, I could send you e-mails from our kayak or even from my favorite spots in the Amazon.
This is all new. Thirty-six years ago, when I first met Elisabeth and came here to visit her family’s farm, there was no electricity. I wrote my reports by the light of a kerosene lamp and I drove to the nearest city with a phone to call them in, one word at a time.
Super-highways were also non-existent. To reach the nearest paved road, we endured clouds of dust in the winter and rivers of mud in the summer. Now, the four-lane “Sugar Road” is nearby — cutting a beeline through cane country and connecting to the Casetelo Branco, which, in turn, is just one of several six-lane super-highways that feed São Paulo, a sprawling industrial megapolis larger than New York and Chicago combined.
For nearly a century, this state, also named São Paulo, was seen as the locomotive that pulled Brazil; while Brazil was always viewed as the “land of the future” whose future never came.
But now, the last century’s proven truisms are this century’s outdated clichés.
Most of Brazil’s other states are pulling their own weight. Brazil’s hundred years of debilitating inflation seems to be finally over. An enduring trade surplus has taken hold. Home-grown capital formation and technological development, the key factors that were mostly missing before, are picking up momentum. Hustle, bustle, and self-sacrifice are the new norm.
I recently witnessed a similar phenomenon on the other side of the world, in China. Ditto for India.
These three countries combined have triple the land area of the United States and more than eight times its population — all gearing up toward one overriding goal:
To export …
To build huge trade surpluses …
And to use those surpluses as an enduring fountainhead of capital.
THE GREATEST TRANSFER OF WEALTH OF ALL TIME
I was born in 1946, and the geo-political math I grew up with was like two plus two. Nearly every world conflict was either …
EAST VS. WEST — such as the Berlin blockade, the Korean War, the Vietnam war, or …
NORTH VS. SOUTH — such as the independence movements of the Indian subcontinent, Latin America, and Africa.
But now, the old balance of power is history. I’ve told you how the rich-poor, north-south dichotomy is fading. Plus, as you know, the cold war is virtually disappearing from the collective memory of new generations:
Poland, Hungary, and the Czech Republic, the first to jump-start their post-cold-war capitalist revolutions, have leapfrogged Russia and even some western nations into the modern, high-tech, global economy.
Bulgaria, Romania, and some of the former Yugoslav Republics, anxious to catch up, have unabashedly pledged their allegiance to almost anything and anyone that can get them into the good graces of the U.S. or the European Union.
China and Vietnam have castrated their communism, unshackling free market forces that are proving to be even more powerful than those recently unleashed in Eastern Europe.
Each case is a watershed. In each case, a massive transfer of wealth and power is under way. And everywhere, the process has barely begun.
NEW RULES
To better understand that process, be sure to know the new rules of the game:
RULE #1. Strategic goals have changed. Previously, the focus of rival world powers was TERRITORIAL control and influence. As soon as they could guarantee hegemony over a nation and its people, money and wealth naturally flowed. Today, the only control and influence most nations lust for is with respect to GLOBAL TRADE.
RULE #2. The old definition of “haves” and “have-nots” is out the window. The haves will be all those nations boasting enduring trade surpluses like China and Brazil; the have-nots, those with chronic trade deficits, possibly including superpowers like the United States.
RULE #3. If a country’s production costs are high, it will ultimately lose the battle for global trade. If its costs are low, it will ultimately win.
RULE #4. In the last century, the cold-war rivals and their allies were fixated on an escalating build-up in each nation’s WEAPONRY. Today, with few exceptions, the old arms race is largely irrelevant. What matters more is skillful manipulation in the value of each nation’s CURRENCY.
You remember how Macy’s and Gimble’s used to compete for Christmas shoppers ambling down 34th Street. To attract business away from the competition, all they had to do was announce store-wide sales: “20% off every item!”
Nations can do the same thing. They declare a country-wide sale — across-the-board discounts on every single good or service they export. And to make that happen, all they have to do is cheapen their currency. A 10% decline in the currency is tantamount to a 10% national sale. A 20% decline is a 20% sale.
These are the new rules. Now, let me introduce you to the new players.
FIVE WORLDS
Previously, it was said that all the nations on the planet were split into THREE worlds: The first world was the U.S., Western Europe, and Japan. The second world was the Soviet Union and the iron-curtain countries. And the third world encompassed all the poorer, non-industrial countries, hotly contested by both the first- and second-world powers.
Now, the three-world model is obsolete. In its place, we need a new model with at least FIVE new worlds — still in flux, still scrambling to forge new alliances.
The FIRST WORLD is, as before, the UNITED STATES, but with a new set of allies scattered across the globe.
The SECOND WORLD is the new EUROZONE, united by one currency, integrated into one trade block — sometimes aligned with the United States, sometimes not.
THE THIRD WORLD encompasses all those countries that are still IMPOVERISHED, left behind by the new waves of industrialization that have swept across the rest of the globe. Bangladesh (the former East Pakistan), Sri Lanka (the former Ceylon), Myanmar (formerly Burma), and scores of other nations are prime examples of this oft-forgotten group of outcasts.
THE FOURTH WORLD is the ANTI-MODERN world. It overlaps with the other four, defying definition strictly in terms of national borders. It covers the economically impoverished, politically disenfranchised, zealously anti-Western peoples, stretching from the northwest coast of Africa to the southern Philippine island of Mindanao.
THE FIFTH WORLD? The new EXPORT powers like Brazil and China!
Each of these worlds has sought, in its own way, to stake a claim to the limelight of world attention. But none, not even the ultra-powerful United States — not even the most radical fringes of the anti-modern fourth world — have been able to eclipse the speed of change now under way in the fifth world, the export superpowers.
A NEW ALLIANCE
It’s early Monday morning, December 22, 5:30 a.m. in Brazil, 2:30 Eastern. Except for an occasional rooster, I hear no birds. Only crickets.
Meanwhile, about a thousand miles to the north, at the Palácio da Alvorada (Palace of the Dawn) in BrasÃlia, president José Inácio (Lula) da Silva will soon be at work, celebrating two of the accomplishments of his first year in office.
First, he helped rescue Brazil from the jaws of last year’s economic chaos.
Second, he formed and helped lead a new international alliance called the “Group of 20.”
The Group of 20 is the FIFTH WORLD PAR EXCELLENCE — the export superpowers and wannabe powers, including Brazil, China, South Africa, and 17 others.
These 20 nations have very little in common culturally or politically. And many have nothing in common geographically. But they are seeking to unite with a common agenda:
– To keep their currencies cheap, in lock step with the falling dollar …
– To form a new trade block that can counter the traditional dominance of the first and second worlds …
– And to grow their trade surpluses into a powerful reservoir of new capital.
The Group of 20 made its debut at the world trade talks in Cancun earlier this year. But the meeting broke down and ended in failure.
Lula insists it wasn’t his fault. Instead, he says it was the old THIRD world — the smaller, still-poor countries — that refused to seriously negotiate with the rest.
Most observers agree with Lula on that point, and so do I. The Group of 20 wants to sit down and talk business. It’s now up to the U.S. and European trade negotiators to take the next step.
I cannot tell you what will come of this. I cannot even tell you if the Group of 20 will survive as a viable alliance.
But one thing is certain: Whether it’s the Group of 20 or some other group, the FIFTH WORLD is going to change the face of the planet.
Decades from now, they will have built up the savings and capital that were sorely lacking for hundreds of years. They will have new infrastructures with fiber optics, more super-highways, modern river-based transportation systems, and even bullet trains. They will have emerged as the number-one drivers of world growth.
To some degree, they already have.
THE DANGERS OF THE DOLLAR DECLINE
What does this mean to America and American investors? For the near term, it’s bad. For the long-term future, if we can only adapt, we’ll do just fine.
I have before me the Folha de São Paulo, with Martin Wolf’s recent Financial Times article about the dangers of the dollar decline. Many of his points dovetail with mine:
While the export countries are forming a new alliance, the dominant player of the first world — the United States — is mired in deficits that will hamper or even sabotage its economic recovery.
The big warning sign: The U.S. dollar is falling uncontrollably! Since January 2002, it’s down 31% against the Australian dollar, 19% against the British pound, and 18% against the Canadian dollar.
Normally, a dollar decline of this magnitude would enhance our export power tremendously. But right now, we see little movement in that direction.
Reason: The currencies of the strongest trade surplus countries — precisely the ones where stronger currencies would do the most to reduce our trade deficit — have fallen almost in lock step with the dollar.
So no matter how far the dollar falls against OTHER currencies, little changes. Vis-Ã -vis the fifth-world countries, we’re on a treadmill.
The Chinese yuan, pegged to the dollar, is the prime example. But it’s not alone. We see a similar pattern with the Hong Kong dollar and the Malayan ringgit. The Indian rupee, the Korean won, and the Russian ruble have also barely budged against the U.S. dollar.
The Brazilian real HAS bounced back against the U.S. greenback, but only because it was beaten down so badly last year.
Right now, America’s trade deficit with the rest of the world is the largest in history — 5% of its GDP. No matter what the Federal Reserve does in 2004 and no matter who wins the presidential election … the U.S. trade deficit is a fact of life from which I see only two possible escape scenarios:
SCENARIO A. The dollar decline accelerates and deepens.
Mark Cliffe of ING Bank, quoted in the Financial Times article, argues that just to reduce America’s current account deficit (which includes the trade deficit) to 2% of U.S. GDP, you’d need a FURTHER decline in the trade-weighted dollar of a whopping 34%.
And even this dire scenario fails to factor in the big wild card: If the dollar falls even half as far, will foreign investors continue to hang on to their huge portfolios of dollar investments? How much of them will they dump? And what will that selling do to our current account deficit … to our bond market … to our stock market … and to the dollar itself.
SCENARIO B. The U.S. economy grows at a far SLOWER pace than the economies of the new export superpowers. That forces U.S. consumers to buy relatively fewer foreign goods, while foreign consumers can buy relatively more U.S. goods, reducing our trade deficits.
In some years, “slower growth” means weaker and shorter recoveries. In others, it means deeper and longer recessions. But in the long run, the result is largely the same: The U.S. falls behind economically and technologically, while the fifth world jumps ahead.
Which scenario will it be? A or B? Probably a combination of both.
Warning: Don’t expect the fifth world economies or their stock markets to go straight up. They, too, will still suffer from boom and bust. They, too, will feel the shock waves of any troubles suffered by North America or Europe.
But looking out over the years and decades, the pattern is now clear: The old superpowers are going to weaken. The new superpowers, with deep reservoirs of cheaper labor and latent buying power, are just now beginning to show their true face to the world.
IMPORTANT NOTICE: Next week I will be on “vacation,” preparing my recent books for publication in Germany and Japan. So there will be no “Martin on Monday” December 29th. The next one will be January 5th.
Between now and then, I wish you a wonderful, restful, and healthy Christmas and New Year.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
