Mike Conlon
Senior Instructor
instructor@mywealth.com
When Goldman Sachs coined the term
“BRIC” (Brazil, Russia, India, China) for the fastest-growing developing economies in the world in 2001, I highly doubt that they thought that within 10 years these countries would actually take their advice and form a coalition. And yet here we are. The first BRIC summit occurred this week and went largely unnoticed. More of a symbolic meeting than anything else, the one topic on everyone’s mind was what to do about the US dollar?
Why was the meeting symbolic? Because the BRIC economies have absolutely nothing in common! The only common factor they have is that they hate having the US dollar as the world’s reserve currency. Let’s face it, these countries speak 4 different languages and are on 3 different continents bordered by 3 different oceans. One country is communist, another formerly was, and the others are republics.
Half of BRIC are commodity producers (Brussia) and the other half are end users (Chindia). With this in mind, one would think they would have different reactions to the strength of the US Dollar. But surprisingly they all seem to be on the same page. Let’s take a look at the Claymore/BNY BRIC ETF (EEB) and compare it to the US dollar to get a picture of the full story.
As You can see from the chart, the BRIC ETF (EEB) and the US dollar have an inverse relationship; that is when the dollar is going down, the BRIC ETF is going up and vice versa. So it makes sense that some of the BRIC countries would like us to have a weak dollar. But yet we always hear that China is concerned about our weak dollar? What gives? What do they want from the dollar? (If you’d like to learn more about currency investing, click here)
The short answer is that they don’t know. Brussia benefits the most when the dollar is weak as this tends to be inflationary which results in higher commodity prices. Chindia would rather see a strong dollar, so that the US will consume more of their goods, their energy costs will be less, and they’ll get more interest on their dollar reserves.
So what did they hope to accomplish at their first summit? Basically it was a wake-up call to the US and the rest of the world that these economies want to be players and taken seriously. After all, it wasn’t that long ago the China was accused of unfair trade practices and criticized for keeping its currency pegged, Russia was privatizing companies and blowing out foreign investor holdings, and Brazil was defaulting on their debt!
And they claim the problem is having the US dollar as the world’s reserve currency! They wouldn’t even be having this summit if it weren’t for a guy sitting in an office at
85 Broad St!
So as we can see, the BRIC countries are nothing more than a collection of developing economies looking for a bigger place on the world stage. But rather than all of the negative talk about the US, they should be thankful that their past sins have been forgiven and that they’ve been encouraged to grow and become prosperous.
After all it could be worse. Emerging economies South Korea, Hong Kong, Indonesia, and Thailand could have been added to the existing Brazil, Russia, India, China. I’ll let you figure out what that acronym is!
