China and India Flunk the ‘Acid Test’

Several weeks ago I discussed how important money velocity is and why Dr Lacy Hunt is the master of this concept, which I now call the ‘acid test’ for countries’ economies.

The point you should take away from that video is that money velocity is falling almost everywhere. When that happens, it’s a clear sign of speculation in investment and the inflation of debt and financial asset bubbles.

This scenario NEVER ends well.

I described how the US was the best house among the leading developed countries like those in Europe and Japan, despite our falling money velocity since 1997. I talked about China being the lowest!

Here’s a chart showing the money velocity of the four largest emerging economies: China, India, Brazil and Indonesia.

EM Money Velocity: China Overinvest, India Underinvests 4-12-18

Source: Hoisington Investment Management

[Click to enlarge]

Look at Indonesia.

It’s the only country with rising velocity into 2008, reaching to 2.90. It’s since fallen modestly to 2.63, which is still healthy and higher than the best developed countries!

Indonesia is at 55% urban and has decades of growth to come. Its workforce growth trends don’t peak until around 2055.

Brazil’s money velocity peaked the highest at 5.0 in 1997. It was still as high as 4.75 in 2004. That’s when Brazil was at its best, moving into peak urbanisation. It went from 82% urban in 1995 to 86% urban in 2010 and has made little progress since.

The South American country has fallen to 2.83, at which point it is still the highest of this group. It also still has modest growth in workforce trends into 2035, before slowing longer term.

The country with the lowest urbanisation, at 34%, and greatest demographic growth potential is India.

It doesn’t peak in workforce until 2050–55.

It should see its urbanisation accelerate when China fails and makes way for India to become the next ‘big thing’.

But, India’s money velocity peaked in 1996 at a modest 2.10 and has fallen down to 1.26! That’s lower than the US, although higher than Europe.

The problem here is simple: India has underinvested in infrastructures and capital goods like plant and equipment.

That underinvestment makes the return on all investments lower because everything, from travel to communication to logistics to electricity access, is harder in India. I know this for a fact because I’ve been there three times, spending longer than two months there.

Thankfully, things are changing there, and fast! And that’s a great sign given its un-ending urbanisation and demographic potential.

China is the worst ‘money velocity offender’ by far.

It peaked in 1990 at an already dismal 1.50 and is at a pathetic — even coma state — of 0.52 currently.

How does the fastest-growth, major country in the world and second largest economy flunk the acid test?

By cheating!

By endlessly building ‘stuff for nobody’ — empty condos, malls, and offices everywhere. 22% of homes are empty a comprehensive new study found.

The cardinal sin in business is overbuilding because it creates high debt and fixed-cost burdens that sink your profits and ultimately drown you.

This is why I see China taking a decade to work off its excesses.

This is why I see China enduring the worst crash of the leading countries ahead.

INDIA is where the future money is. And next, countries like Indonesia in Southeast Asia.

NOT China…at least for a good while.

I’d bet money on it.


Harry Dent,
For The Rum Rebellion

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