Emerging Markets Have a Big Problem

Most analysts love to tout emerging market stocks and Exchange Traded Funds (ETFs). Why? Because it’s the highest growth sector of the global economy.

And long-term I agree with them.

Most of the growth in the next global boom will come from emerging markets because most developed countries are aging and slowing, many facing shrinking workforces and population in the decades ahead, especially central and southern Europe and East Asia.

But emerging markets have a big problem: falling commodity prices.

I often point out to investors that emerging markets (represented by the ETF EEM) correlate more with commodities prices (CRB) than with stock markets in developed countries. You can see this clearly in the chart below…

See larger image

See how both of these markets had a secondary (B-wave) peak in late April 2011, and how both are nowhere near their highs, as U.S. stocks are?

Well, I’ve been predicting for years that commodity prices would put in a major peak on a very clockwork-like 30-year cycle. That cycle clearly peaked in mid-2008, with a secondary peak in April of 2011.

Most analysts have been expecting endless growth in emerging countries to only drive commodity prices up. Instead commodities prices are falling, impacting emerging countries’ growth and stock markets.

Earlier this year I was speaking at a Platinum Partners conference in Whistler for Tony Robbins. Among many great speakers, he had Russell Napier dial in from England via Skype. Napier made a number of points I found very interesting…

I had been expecting southern Europe to trigger the next financial crisis. But after listening to Napier, I shifted the focus of my research away from southern Europe to the region he sees as the danger zone… and what I found supported his view. I now believe there’s a more dangerous trigger just waiting to fire…

That is, emerging countries and China could very well bring about the next great crash as commodity prices continue to fall.

There are nine reasons why…

Reason #1: One consequence of Quantitative Easing (QE) in developed countries is that it pushes up inflation in emerging markets, which slows their economies.

Reason #2: QE tends to push emerging market currencies above where they would be otherwise, and that hurts their exports.

Reason #3: Due to these impacts and falling commodity prices from slowing world growth, emerging markets’ exports and foreign exchange reserves slow, and in some cases fall.

Reason #4: Falling commodities prices are good for developed countries because they lower inflation and imports, but they’re bad for emerging markets because most are major commodities exporters. Falling prices hurt their most profitable stocks, companies, and jobs.

Reason #5: Because China now exports more to emerging markets than to developed countries, slowing in the former hurts China’s exports more than local slowing, even though falling commodities prices reduce import and living costs.

Reason #6: China dominates the global demand for many commodities, especially the industrial metals and minerals used to feed its high growth and its manufacturing export machine.

Reason #7: A vicious circle is gathering pace, where falling commodities prices hurt emerging market exports, which hurt China’s exports, and that causes commodities prices to fall further, which hurts emerging market exports, and so on.

Reason #8: Declining foreign exchange reserve growth means less demand from emerging markets for U.S. Treasury bonds, which could cause interest rates to rise despite QE, or could force the Fed to buy more bonds to maintain low longer-term interest rates.

Reason #9: And if long-term interest rates continue to go up, as our Treasury Bond Channel suggests, it would adversely impact the housing recovery, corporate borrowing costs, and stock valuations in the U.S.

Southern Europe may still contribute to a global crisis sometime between late 2013 and early 2014. But a continued slowing in China’s exports would wreck its economy and trigger a burst in the greatest real estate bubble in history. This could end up being the critical trigger instead.

When China’s overbuilding and real estate bubble bursts, get out your life boats! The fallout will be monumentally painful thanks to five years of non-stop stimulus and speculation.

All you can do is stay nimble. It’s the only way you’ll be able to react, to protect yourself from the collapse and to profit from opportunities, when the crash comes.


Harry

 

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Categories: Commodities

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.