Like equity markets everywhere, foreign exchanges in Latin America, Eastern Europe and Asia have taken quite a tumble over the last year and a half.

Yet this is not like the Mexican Peso Crisis of 1994 or the 1997 Asian Financial Crisis. Those downturns were brought on by poor government policies and financial mismanagement in these regions.

But these developing economies have since been rebuilt on sounder financial footing. Moreover, you’ll notice that the recent worldwide sell off in equity markets was brought on by problems with U.S. real estate, mortgage securities and banks, not in developing markets themselves.

Still, in their rush to avoid risk many U.S. investors are leaving – or avoiding – these emerging markets at precisely the wrong time.

Yet the risk premium is much lower than it used to be. Most developing countries have already evolved from communism to democracy and from state-controlled economies to free-market ones. There are plenty of other good reasons to diversify into these markets, too.

Let’s start with the big picture.

Emerging Markets – Covering 85% of the World’s Population

While emerging nations cover 77% of the world’s land area and represent 85% of the world’s population, they currently produce only 23% of the world’s gross domestic product.

That’s changing…

There are now 3.8 billion “middle class” people in the world today. Thanks to emerging markets, that number will double over the next 20 years.

As The Wall Street Journal wrote last month:

“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months, according to the United Nations. These men and women will need everything, electricity, water, food, health care, shelter, schools, computers and, of course, jobs. Many have the potential to improve not just their local environment but the world.”

Some companies in the West – and, of course, many of those in developing markets themselves – are set to enjoy an extraordinary period of prosperity.

These new consumers will need dishwashers, microwaves, laptops, cell phones, automobiles, eyeglasses, credit cards, pharmaceuticals, insurance and every other product and service we already take for granted in the West.

Why bet on companies that may (or may not) create a new cancer drug or hit a new gold strike or develop a faster computer when you can bet on dead certainties: companies that are busy meeting the enormous untapped needs of billions of new middle class consumers.

January, for example, was the first month ever in which car sales in China topped U.S. car sales. And it may be that way for the rest of your life – and your children’s lives.

Emerging Markets: Promising & Cheap

Right now the world’s emerging markets are both exceptionally promising and extraordinarily cheap.

Moreover, a lot of these developing market stocks are denominated in currencies that are tied to the dollar. (So a stronger greenback like we’ve seen lately won’t hurt them – or the dollar value of your securities.)

No wonder emerging markets manager Mark Mobius says he feels “like a kid in a candy shop.”

The potential in these markets is greater than it has ever been before. Anyone who can count to 180,000 (a day) should understand exactly why.

Source: Emerging Markets: 180,000 New Investment Opportunities… A Day

Junior Mogambo Ranger (JMR) Rick K. thinks that I am being too critical of the Dow Jones Industrials when I snort in derision at that index sporting the unheard-of price-to-earnings ratio of 87, as “almost all of the insanity comes from just one company: General Motors (NYSE:GM).”He explains that “GM lost $74.29 per share over the last year (on a stock priced at only about $17 per share), compared to earnings for the rest of the Dow of $92.37 per share. So GM alone lost 80% of what the rest of the Dow companies made over last year! If GM’s loss was excluded from the Dow’s earnings, its P/E would be around 16 rather than over 80.”

Naturally, I figure that, as the old saying goes, “What’s good for GM is good for the country,” and so it reflects what is actually going on in the country. And besides, it really makes no difference anymore, anyway, since accounting itself has gone to “the dark side of the Force”, like everything else.

And to show you what I mean, Bloomberg.com reports that regulatory filings show that “Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets.”

And so everything is lies, lies, lies! Hahaha! We’re freaking doomed!

This saved me from having to mention that the other indexes are just as weird, as the historical average for a Price-to-Earnings ratio is 14, with a P/E of 20 being near the extreme of “overvaluation”, and while currently the P/E of the DJ Industrials is 86, the DJ Transportation Index has a P/E of 24, the DJ Utility has a P/E of 16, the S&P500 has a P/E of 23, and the S&P Industrial Index has one at 22! Hahahaha! Apparently meaningless, as the prices of these stocks are actually rising! Hahahaha!

And the reason is that nobody is buying, because nobody has any money! I say this as a way of introducing this week’s episode of “What is wrong with this picture?” The scene opens with the Commerce Department reporting that consumer spending rose 0.2% in April, which is down from the 0.4% increase in March.

The more stupid of us are busily trying to multiply this 0.2% increase for April by 12 months (to get an annual figure), and screwing it all up pretty badly, and we keep re-entering the data over and over and making stupid mistakes until we are so frustrated that we are jamming the calculator’s keys with murderous force, and our fingers hurt.

Coincidentally, the Commerce Department also said that incomes grew 0.2%, which even included the $134 billion in the government’s tax rebates that are only half sent out! Hahaha!

If you are like me, you are suddenly realizing that your income did not go up by 0.2%, or any percent, because if it did, it seems like you would have remembered it. And anyway, if my income DID go up, then where in the hell is all of this money?

In fact (and I think I speak for everyone), we’re slaving away at our stupid jobs like the caged, workaholic rats we are, and all we ever get is an ungrateful boss, an ungrateful spouse and ungrateful children whining, whining, whining that you don’t give them enough money, and how I “owe” them money just because they were born and how they didn’t “ask to be born”, even though I sure as hell did not ask them to be born, and pretty soon we are yelling about who is responsible for their being born at all, but everyone knows it’s about the money.

In fact, everything is about the money these days. Mostly the lack of it. But mostly, mostly because of businesses and governments lying about it. Ugh.

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Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

Source: A Phantom Increase in Income

“Due to the stressed condition of the credit market as a whole and the unprecedented speed at which rumors and speculation travel and echo through the modern financial media environment, the rumors and
speculation became a self-fulfilling prophecy,” Schwartz told the senators. “There was, simply put, a run on the bank.”

So there you have it. Bear’s collapse had nothing to do with packaging worthless mortgages destined to turn upside-down. It had nothing to do with derivative instruments whose value could be determined only in the abstract, through mathematical models that had no bearing on real-world considerations. No, it was rumormongers who started raising impertinent questions about the mortgage securities and the derivatives of derivatives of derivatives. And it was speculators who had the temerity to act on those rumors. Bear’s balance sheet was pure as the driven snow until a bunch of ne’er-do-wells started stirring things up.

And none of the senators in attendance called BS on Schwartz. If they really want to take him at his word, one wonders if they’ll start investigating and identifying all those rumormongers and speculators who so recklessly and with no reason took down one of the pillars of American finance.