Back in 2001, the Goldman Sachs Group Inc. (GS) – eager to push its clients toward emerging markets investment – created the acronym “BRIC” to stand for Brazil, Russia, India and China, the four emerging markets the investment bank’s strategists believed would become a dominant part of the world economy in the years ahead.

Such was the case until the global financial crisis happened. Now, Russia is falling out of investor sunlight and into the pits of recession.

Russia’s Economic Development Minister Elvira Nabiullina projects a 2.2% gross domestic product (GDP) decline for 2009, according to EurasiaNet. But the current global financial crisis is making previous estimates look foolish and impossibly rosy (U.S. GDP was originally estimated to fall 3.2% for the fourth quarter. In reality, GDP plunged 6.2%).

The culprits: A falling ruble, plummeting oil prices, war with Georgia and a gas-export dispute with the Ukraine.

Russia’s economy is heavily reliant on its oil reserves, making the effects of falling oil prices easy to measure. But the silent killer of the Russian economy has yet to be full measured – the money spent in a thus-far vain attempt to prop up its falling ruble.

The ruble recently fell to a level not seen since 1998, a scary statistic because that was the year Russia experienced a nationwide banking crisis – and it was also a period during which world markets were being roiled by the Asian Financial Crisis, also known as the “Asian contagion.”

In an effort to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold more than a quarter of the country’s gold and foreign-currency reserves. Russia’s reserves, the world’s third-largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

That has some economists calling for a “free-float” – or a big devaluation – to avoid depleting all of the reserves.

The tactic, and the accompanying effect on investors, is nearly identical to that of 1998, when the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt. Investors are fleeing Russia because the government is tapping its reserves to defend the ruble, further eroding investor confidence and undermining the currency.

Brazil, India and China are currently faring far better than Russia currently, but are still dealing with their own unique struggles. That has led analysts to question the viability of the BRIC acronym.

Milton Ezrati, a senior economist and market strategist at Lord Abbett & Co. LLC, recently published a report titled, “Broken BRIC,” in which he questions the notion of lumping those economies together – especially in view of their wealth of differences.

“We, at Lord Abbett, were always skeptical of BRIC,” Ezrati said in an interview with MarketWatch.com, noting that investors should diversify beyond emerging markets. “The whole concept behind the BRIC, that these four countries were leaders, is no longer the case today.”

Ezrati no doubt has his share of dissenters, who can quickly point out that while the stock markets of China, India and Brazil are taking their lumps, they are the only major economies in the world with positive GDP growth.

Effect on Local Elections

Looking at Russia’s recent local election results, the country’s decline into the financial red is having little effect on the popularity of United Russia, the party of former President and current Prime Minister Vladimir Putin.

Elections were held yesterday and preliminary results show United Russia racking up commanding leads in local elections around the country, The Associated Press reported. Of course, allegations of election violations abound.

But the bottom line is that those in power are keeping it. Doing so engraves their names next to the economy’s decline; but it also gives them a chance to take credit for recovery if their policies work.

Source: Russia’s Economic Demise Could Turn “BRIC” to “BIC”

Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was “broken” by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn’t appreciate the humor of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too – down $24.

So, here is a good place to take up our guesswork about what is going on in the world’s markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world’s markets have begun a major correction. The world’s governments – led by the United States – are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

“Pink slips pile higher,” reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves – savings – the pressure on Misters Obama and Bernanke to ‘do something’ will increase. What can they do? Spend money.

“US deficit set for post-war record,” reports the Financial Times. Reports today tell us that Obama says deficits will go “over $1 trillion.” One estimate put it at $1.2 trillion for ‘09. We’ve seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet’s chump of last resort. He didn’t have any money. Still, when an economy slumped, he nevertheless kept spending – buying on credit. Gradually, the whole world economy came to rely on him. But now he’s stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux – all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can’t afford a bailout of this magnitude. Trillion-dollar deficits won’t be enough. Martin Wolf, in the FT, quotes a report from Levy Economics – “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.”

With rising unemployment the pressure to ‘do something’ grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can’t cure the patient. All they can do is to deliver larger and larger doses of their quack medicine – until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn’t reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron’s survey told us that Wall Street’s strategists all believe stocks will go up in ‘09. The only question is how much. The bulls think they’ll go up and keep going up. The bears think they’ll go up…and then go back down again.

And currently, there’s more money on the sidelines – waiting – than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in ‘08…it wants to get even in ‘09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it’s what you find at the beginning of one. People still think that they will make money in stocks – it’s just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don’t know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in – just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle – such as we were in 1920 – we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future’s gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we’re out of time for today.

*** This year marks the 50th anniversary of Cuba’s revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

Source: Global Financial Illness

But have no fear.

It’s not too late to grab a piece of the pie.

The trick is that you’ll have to look beyond the obvious choices like major oil companies, drillers and other sectors that are hopelessly bid up right now. And you can play various types of funds, as well as stocks, as we’ll demonstrate.

The Four Factors Giving Life to the Commodity Bull

But before we tackle the how, let’s tackle the why:

• First, it’s important to understand that high oil prices are simply going to go higher, still. There will be inevitable pullbacks, but as we’ve written so many times in the past, the math is very simple – people are simply using more oil than at any time in history and worldwide demand is accelerating.

• Second, it’s also important to note that we haven’t had a major new discovery of any substantial size in the last 30 years. And by substantial, we mean big enough to change the balance of supply and demand and, by implication, to reverse the runaway increase in prices. The lack of any new discoveries, then, also points to higher prices.

• Third, absent an immediate, cost-effective and widely available substitute, oil is increasingly nationalistic in nature. This means that oil producers – and particularly the tyrants with spigots – will begin holding back production for their own use. That will reduce the supply available on world markets, further enhancing the upward pricing pressure.

• And fourth, while higher prices are finally inducing some drivers in modern industrialized countries to drive less, developing nations don’t give damn about conservation and are guzzling gasoline like there’s no tomorrow – which, for them, is entirely true. For these nations, access to energy and to petroleum is the literal equivalent to survival and they’ll do everything they can to ensure it. So any drop in demand we’re experiencing is almost immediately offset by higher consumption in such markets as China, India and many parts of South America. And that offsetting consumption may well persist for years.

That’s a very painful reality to face. But it does bring us to the fun part of this commentary: The profits.

New Markets = New Profit Opportunities

Any time you have sustained supply-and-demand imbalances, you also the potential for huge profits. And what’s happening now is no different.

Viewed in that light, higher oil prices can actually be a good thing for the stock markets, just as the rising price of such “commodities” as gold, copper, cotton, silk and spices have been for various nations since the dawn of time.

The reason is that excess profits that would ordinarily flow to Caracas, Moscow and Riyadh, are being recycled into the best global stocks on the best first-tier global stock exchanges, including the New York Stock Exchange, the Tokyo and Hong Kong stock exchanges, and the Frankfurt, Euronext and London exchanges.

But that may be coming to a head as trillions of dollars are chasing a diminishing number of high-quality stocks, which over time will propel those shares to excessively high valuation levels.

So what’s an investor to do? Savvy investors will once again have to go with the (global money) flow, ferreting out markets that haven’t yet hit “mainstream” radar screens, but that still are likely to benefit from rising oil prices.

We refer to them as “frontier” markets and they include such mineral- and resource-rich places as Nigeria, Sudan, Egypt and Bangladesh among others. They’re obviously beyond the same old BRIC choices that have become so popular in recent years.

Most of these markets are so small that many investors overlook them altogether – but they’ll soon become very popular because of the tremendous upside they offer.

Even with political upheaval, hyperinflation, open warfare and catastrophic human and natural disasters, frontier markets are piling on stunning returns. Most are benefiting significantly from rising commodity prices that, in turn, produce higher corporate profits.

As a case in point, consider the Standard & Poor’s/IFCG Frontier Markets Composite Index posted a mouth watering 43.3% return last year. And individual markets did even better. Bangladesh turned in 128.3% while Cote d’Ivoire nailed down a 122.7% gain. The index’s worst performer, Estonia, plunged -14.2%.

Clearly with a range like that, so-called frontier markets aren’t for everybody especially since they’ve gotten so expensive as more money has flowed into them. Data shows that many are trading at Price/Earnings (P/E) ratios that range from a high of nearly 100 for Vietnam to a “mere” 35.9 in Slovenia.

Still, even at these valuations, we can make the case that higher commodity prices will allow these markets to grow for years to come – especially given that they are starting from such a small base.

Which makes them a logical choice for adventurous investors who want to get in before they become hot on the country club cocktail circuit.

Eurostat, the European statistics agency, said prices rose in March at a 3.5 percent annual rate in the 15 countries that share the euro, the highest rate since June 1992. The rate in February was 3.3 percent, which had itself been a record. Inflation is running far above the European Central Bank’s 2 percent guideline.

The concern about rising prices is not confined to the euro zone. In a speech on Monday, the governor of the Bank of England, Mervyn King, noted that “food prices on world markets are more than 50 percent higher, and oil prices two-thirds higher, than they were a year ago.”

Read on at the NYT.