The Wednesday Letter #244 - 10/30/2024
The Wednesday Letter #244 - 10/30/2024
THIS WEEK: BRICS Countries: Economics or Geopolitics?; Ambitious 'Robber' Americans; The AI Stock Mania in 2025 and Q3 Read-Across to Nvidia; Investment Themes to Watch.
🇺🇸 You may appreciate as a reprieve from the constant drumbeat everywhere that there is nothing in this week’s Letter about the US presidential election. Enjoy the quiet! 🇺🇸
BRICS COUNTRIES: ECONOMICS OR GEOPOLITICS?
The BRICS countries met last week in Kazan, Russia, for their 16th annual summit. BRICS was an acronym invented in 2001 by Goldman Sachs strategist Jim O’Neill in an effort to help his employer sell investment advice and products to the BRICS countries (Brazil, Russia, India, China and South Africa) and to other emerging markets. O’Neill did not conceive of it as an economic coalition, let alone a geopolitical one. (In his latest op-ed two weeks ago, he writes that ’The BRICS Still Don’t Matter’.)
The original BRICS group became a real organization in 2006 and has since sought to expand its membership by adding other middle or low-income countries. The original four (Brazil, Russia, India, China) joined in 2006 and South Africa joined in 2010. After a fourteen-year hiatus, four more countries joined this year, Egypt, Ethiopia, Iran and the United Arab Emirates.
The application process for a new country to join is informal, but all existing members have to agree to a new member joining. Among others, Argentina was offered to join in 2023 but declined; Algeria applied in 2023 but later declined to join; Saudi Arabia was invited but declined; Turkey applied to join but was blocked by India; Venezuela is rumored to have been blocked by Brazil. Several others have applied or been invited to join.
The BRICS and other coalitions like the Shanghai Cooperation Organization (SCO, see TWL #228) and the Belt and Road Initiative (BRI) have become rallying forums for China and Russia to push through their vision of a post-American dominated world order. The BRICS, SCO and BRI are all headquartered in China, Shanghai or Beijing. Although Russia and China both lie comfortably above the Equator, at equal or higher latitudes than the US and Europe, they have recruited other nations under a banner of shared grievances which they refer to as “the global South”.
The BRICS’ primary stated mission is to de-dollarize the world economy and in particular their own trading currencies and reserves, and to create new financial institutions that are less dominated by Western economies. To this effect, the BRICS New Development Bank is a response to the IMF and/or World Bank and it already has capital of $50 billion.
In recent weeks, a variant of the chart below has been posted in several places. Its purpose is to show that the combined GDP* of the BRICS has exceeded that of the G7 since around 2020. The G7 countries are the leading developed economies, the United States, the United Kingdom, Germany, France, Italy, Japan and Canada. The problem with this chart is the asterisk added to GDP to signify that it is GDP at purchasing power parity (PPP). We explained in TWL #225 that PPP adjustments are not reliable on a macro level and that the IMF had its own misgivings about using PPP for macro comparisons.
By contrast, here below are the raw numbers without PPP adjustments. The total GDP of the original five BRICS added up to $25.9 trillion in 2023. This figure grows to $27.4 trillion if we include the four new members of BRICS. The total GDP of countries that we call collectively the West was $59.7 trillion in 2023. The difference is even starker if we draw per capita comparisons. The GDP per capita for all the BRICS including new members was $4,153 in 2023, less than one tenth the $55,685 equivalent figure for the West.
One thing worth noting about the BRICS while they endeavor to add more countries to the organization is that the large countries that really move the needle are already in, and indeed were already in with the initial four members. From here on, as shown with the four new members, total GDP additions will be small and the group’s GDP per capita will be averaged down to lower levels.
One thing that the BRICS countries do have in excess of the West is population. We see in the first column that the total BRICS population today is 3.6 billion vs less than 1.1 billion for the West. This is largely irrelevant to economic competition in times of peace but it could gain more significance in times of war. The non-West population today is about 7 billion people. From China’s perspective, their countries are all potential BRICS members. This mass of humanity, coupled with China’s immense manufacturing capability, could at some point pose a meaningful security challenge to the United States.
On the other hand, the evolution and expansion of the BRICS is not linear. With more countries being added, cracks will start to appear, as indeed they already have with India blocking Turkey’s accession, Brazil slow-walking Venezuela’s, and Argentina and Saudi Arabia declining to join. There will be a juncture when many of these countries will realize that their historic interests and differences with each other run much deeper than their displeasure with the current world order.
AMBITIOUS ‘ROBBER’ AMERICANS
The man tasked with overseeing the world’s largest sovereign wealth fund says that Americans are more ambitious than Europeans, and that the pay of some American CEOs is ‘like daylight robbery.’ Nicolai Tangen is CEO of Norges Bank Investment Management. Norges manages Norway’s sovereign wealth fund that now has assets of $1.73 trillion. The issues of ambition and pay are linked.
About American vs. European ambition, we would explain it by this combination of factors: 1) better incentives are available in America and 2) there is no ‘relevance safety net’ in America. American incentives are much greater than Europeans. There is no limit to the amount of money that an American can earn without inviting unwanted scrutiny or rebuke from neighbors or society at large. Making a lot of money in Europe looks morally suspect, but it looks virtuous in America.
In Europe, once a person passes a certain income level, they risk becoming a target for all constituencies. For some unclear reason however, this animosity towards high earners does not apply to athletes or showbiz stars, who can earn hundreds of millions of dollars without facing much real criticism. Europeans do not sufficiently appreciate the talent and genius that are needed for world-class business leadership. They do not flinch if a Ronaldo or a Mbappé is paid vast sums of money, but they get quickly uncomfortable if a corporate CEO is paid one tenth of those sums.
Note the way that this attitude towards money is transmitted through language. In America, a person ‘makes’ money, which literally means that they created wealth out of their own work, whereas in France for example, a person ‘wins’ money (gagne de l’argent) which literally means that they got lucky and won as in a lottery, a chance event that has nothing to do with their own effort and initiative.
The second factor that makes Americans more ambitious than Europeans is that an American’s professional/social standing and relevance are proportional to their bank account. The most relevant and visible opinionator today is Elon Musk, the man with the biggest bank account. Some slow-earning wisemen and women may be revered and sought for their views in Europe, but less so in America. The poor but wise in America is an academic or an egghead who may or may not be interesting but is rarely worth listening to. This is all captured by the saying that “money talks, bullshit walks.”
I am exaggerating but only a little. Kurt Vonnegut was also exaggerating, but only a little, in this passage from Slaughterhouse-Five that speaks to the absence of a ‘relevance safety net’ in America:
It is in fact a crime for an American to be poor, even though America is a nation of poor. Every other nation has folk traditions of men who were poor but extremely wise and virtuous, and therefore more estimable than any one with power or gold. No such tales are told by the American poor. They mock themselves and glorify their betters. The meanest eating or drinking establishment, owned by a man who is himself poor, is very likely to have a sign on its wall asking this cruel question: “If you’re so smart, why aint you rich?”
Tangen’s other point is about the pay of corporate executives. If he truly feels this way, it is suprising that his fund has not done more to push back against large compensation packages. Our own view is that founder CEOs deserve all that they can get, so long as corporate boards are relatively independent (but how many truly are?). We feel less sure about CEOs who are not founders and who convince captured boards to award them huge stock option packages.
THE AI STOCK MANIA IN 2025, AND Q3 READ-ACROSS TO NVIDIA
Barring the unexpected, the AI mania in the stock market will last until at least the end of 2024. The ‘unexpected’ in this case would be a bad earnings release from Nvidia or an exogenous political or geopolitical event that would send the entire market down before the end of December. With the US election likely to generate some protests (irrespective of the winner) and Nvidia reporting earnings on November 20th, we cannot completely rule out the unexpected.
Outside of these two scenarios, the market is likely to hold up for the next few weeks. Liquidity remains good, although not as good as a few weeks ago; Q3 earnings have been strong so far (75% of reporting companies have beaten expectations); and the calendar favors a stable or rallying market. The AI and tech sector has been the main driver of the market since October 2022, and within the sector, Nvidia has been the main company to watch. So, do the earnings reports that have been released so far tell us anything about Nvidia’s upcoming earnings?