It’s now been three years since the U.S. and European credit industry looked at each other’s balance sheets and decided enough was enough. The aftermath of the housing bubble has been well documented. But it’s not the past I’m interested in. The market always looks forward.
And the future of America looks bad. This week’s numbers play like a funeral dirge.
Personal income fell by 1.8% in 2009. Naples, Florida led the way with an income drop of 7.1% on average. Some $11 trillion in wealth disappeared in 2009.
And the workers that are left are getting burned-out or facing slowdowns. Non-farm productivity fell 0.9%, which could be due to fewer hours worked.
Furthermore, wholesale inventories rose only 0.1% – meaning the restocking we saw in the early part of the year is now over. And the last of yesterday’s bad news is that small business owners are pessimistic according to the NFIB optimism index. Only 2% had plans to create new jobs and only 12% felt they had the ability to raise prices.
Small business is the driver of innovation and new jobs. If they aren’t hiring and can’t raise prices, the American worker has little hope. This recession looks to keep muddling along. Expect 9.5% unemployment and 2.5% GDP growth in the U.S. in the second half of 2010.
Frontier Markets
But all is not lost. Hope remains. In fact, there is a lot of money to be made for those with the guts to move offshore.
If you look at the world’s top performing stock markets during the first half of 2010 you will find some unusual names. Mongolia is up 71%. Bangladesh came in with a 40.7% gain, followed by Sri Lanka with 35%, and the much maligned Venezuela with an 18% gain.
If you’ve read my column you know I’ve been pushing emerging markets like a broken record. The simple fact is Europe and the U.S. can’t grow until they pay down their debt, write off their housing market and hit the reset button. We’ve reached the point where more bailouts won’t work. More easing by the fed is impossible.
Bernanke can’t create demand. If factories are running at 70% of capacity, they don’t need cheap loans. If housing prices are falling, low mortgage rates won’t entice people to buy.
Japan tried spending their way out of a recession for twenty years. In 1990 a square block in Tokyo was worth more than all of California. Housing prices are still falling in Japan. The “smart” people there think it is better to rent. That’s how you tell the bottom of a housing market.
Japan is now the most indebted industrial country on earth. They have plenty of pretty bridges in the mountains where no one ever goes. Their stock market is still 70% off its highs of 1990.
But like I said, there is money to be made. Lots of money. You just have to expand your search.
In July alone the Poland ETF (NYSE: EPOL) jumped 25%. Chile (NYSE: ECH) was up 17%. Singapore climbed 12% and Indonesia was up 11%.
Banksters and fund managers know they’ve squeezed all the money they can out of the U.S. They are now taking those 0.25% loans from Uncle Sam and seeking the highest return. And it’s not in New York.
The vast majority of global GDP growth will come from frontier markets over the next decade. Not only that, but the U.S. dollar is going to fall in relation to global currencies. This will, in effect, double your profits in emerging markets.
Money Talks
Money flows into emerging markets are already 55% ahead of where they were this time last year and are expected to remain strong, according to Bloomberg. “In the first half of 2010, investments totaled $13bn, compared with $8bn in the first six months of 2009.”
Money is going to where it is rewarded. Mongolia is expected to grow GDP at an amazing 100% over the next ten years. Qatar is expected to grow at 18% next year. This is because these markets are bouncing on such a low base. The GDP of Mongolia is only around $9 billion – despite its vast oil and mineral wealth. Qatar has massive amounts of natural gas, which it is liquefying and shipping to China.
Furthermore, many frontier markets have very low valuations. The average P/E ratio in Mongolia is 4. In the end, you have cheap stocks, increasing currency, nice balance sheets, solid banks, massive growth and free-market politicians. This is the exact opposite of trends in the United States which boast massive debt, slow growth, increasing regulation, looming tax hikes, banks that won’t loan and a population that is 20% underwater on their house.
Be Bold
If you want to make money in stocks over the next few years, you need to get out of Dodge. The first stock I recommended in Crisis & Opportunity – a trading service that makes money from extreme values – was an unknown oil stock in central Asia.
My readers are now up 727% this year and I expect they will be up another 700% before this stock reaches fair valuation.
But that’s just the first of many. Right now I’m looking at a small uranium miner. It used to be the source for Soviet Russia’s bombs. But a Canadian company just won two law suits and now has the rights. Due to these lawsuits, this company is now trading at an unbelievably low thirty-five cents. But it won’t be this cheap for long.
China is building 30 reactors right next door. And the price of Uranium is bouncing off all-time lows.
The credit crunch and commodity bust of 2007 sent many miners to the bone yard. And yet the demand remains. Some 400 reactors are in the planning stage around the world. Now is the time to act.
Sincerely,
Christian DeHaemer
Crisis & Opportunity
