A respected investment house just issued a major warning…
Regular readers know that emerging market stocks have crashed recently. EEM, a large ETF that holds emerging market stocks, lost 32% in less than four months this summer.
In a recent note, analysts at Goldman Sachs (GS) said this isn’t just a run-of-the-mill selloff. It’s the next phase of the global financial crisis that began in 2007.
Here’s what the analysts at Goldman Sachs had to say:
“Increased uncertainty about the fallout from weaker emerging market economies, lower commodity prices and potentially higher U.S. interest rates are raising fresh concerns about the sustainability of asset price rises, marking a new wave in the Global Financial Crisis.”
Goldman considers this the third wave of the financial crisis. The first wave was the U.S. housing crisis in 2007, which caused the S&P 500 to drop 58%…and almost took down the global financial system.
The second wave was Europe's sovereign debt crisis in 2012, when entire countries like Greece, Portugal, Ireland, and Spain almost went bankrupt.
• Like us, Goldman Sachs believes that near-zero interest rates are the main cause of these financial problems…
Yahoo Finance explains (emphasis ours):
One of the reasons Goldman is concerned about emerging markets is that lower interest rates globally have fueled credit growth and a debt buildup, especially in China, and that's likely to impede future economic growth.
Goldman noted that downgrades for emerging market economic and earnings outlooks have spurred fears of a “secular stagnation” of permanently low interest rates and fading equity returns.
Regular readers know central banks around the world have cut interest rates to near zero to stimulate their economies. This has made it extremely cheap to borrow money. It’s allowed people, businesses, and governments to borrow obscene amounts of money over the last few years. We’re not talking billions…we’re talking trillions.
Companies in emerging markets were some of the biggest borrowers. Last month, the International Monetary Fund (IMF) reported that corporate debt of nonfinancial firms in emerging market economies has more than quadrupled in the last ten years. It jumped from $4 trillion in 2004 to $18 trillion in 2014.
Earlier this month, The Wall Street Journal reported:
Emerging-market corporate debt as a proportion of gross domestic product grew 26 percentage points in the decade through the end of 2014, to 74%, with the largest increases in China, Turkey, Chile, Brazil, India and Peru, the IMF said.
For the past couple years, emerging market economies have been growing fast. And fast growth can mask the problems associated with too much debt.
But when growth slows down, companies that borrowed too much have trouble paying back their debts. That’s what’s happening now…
Regular readers know that many emerging markets, like Russia and Brazil, are in recessions (their economies are shrinking). And the IMF expects emerging markets to grow at just 4% this year, the slowest pace since 2009.
Plus China, the biggest emerging market and the world’s second-biggest economy overall, is growing at its slowest pace since 1990.
Here’s more from Goldman Sachs:
…[W]ith bond yields in real terms close to zero, and policy rates at historical lows, this extraordinary combination of events has raised concerns about the sustainability of the financial returns on a forward-looking basis…
• The recent turmoil has been great for gold, which just hit a three-month high…
The price of gold reached its highest level since early July today, closing at $1,165. Gold is up 5.9% in the last month alone. Meanwhile, the S&P 500 is up just 3.3%.
Regular readers know we encourage everyone to hold physical gold as insurance against financial crises. Gold has preserved wealth for thousands of years…through economic depressions, stock market crashes, and world wars.
We recommend that all readers own a healthy amount of gold. It’s the single most important financial asset you can own…especially if Goldman Sachs is correct that we’re entering the next phase of the financial crisis.
• Gold stocks have surged recently as well…
GDX, an ETF that holds large gold mining companies, has jumped 20% in just the last month.
While we recommend owning physical gold for protection, we recommend owning gold stocks for their explosive profit potential. It’s not uncommon for gold stocks to jump 20-to-1 or even 30-to-1 during gold bull markets. That’s because gold stocks are leveraged to the price of gold.
Even after spiking 20%, gold stocks are still incredibly cheap. GDX is down 76% from its record high in 2011.
Louis James, editor of International Speculator, explains what the big move in gold stocks means.
…It shows that there’s plenty of money on the sidelines, waiting for a clear signal that it’s safe to get back in the market. It’s more than proof of concept. What we’re seeing is buying from “early adopters.” These people know that once it’s obvious that gold is back in bull mode, today’s low prices on the best picks will only be seen in the rear-view mirror.
Louis also points out that gold’s February high of $1,302.10 is a key level…
I’m also sure that when gold does take out February’s peak, it will be an obvious “Buy” signal to many investors who are less confident than today’s early adopters. And when it takes out 2014’s peak of $1,380, the signal should be loud and clear, even to the deaf. Each successive prior peak surpassed will add confidence until “everyone knows” that there’s a gold bull charging up the slopes…and all our stocks will be trading much higher.
And he recommends staying disciplined and using today’s low prices to build positions in the best gold miners.
No one can know exactly when it starts. What we do know is that all the fundamentals say it’s coming. That makes this year’s indecisive dragging along the bottom the time to make volatility our friend and build solid positions in the best of the best gold stocks.
Louis has spent years touring mines in some of the most far flung places on the planet. He’s on a first name basis with all the major industry players. And he knows the geology inside and out.
This is why readers of Louis’ investment research service, International Speculator, get to hear about the “best of best” gold stocks every month. In just the past decade, International Speculator has told readers about opportunities to make gains of 100% or more nearly 25 times.
Louis expects to make even bigger gains during the next gold bull market. Take International Speculator for a risk-free trial today to learn of his favorite 10-bagger candidates (a 10-bagger is a stock that goes up 1,000%).
Chart of the Day
Gold stocks appear to be in a bottoming process…
Today’s chart shows the performance of the NYSE Arca Gold Miners Index (HUI). The HUI tracks fifteen large gold miners.
The HUI has been in a downtrend since 2011. But this summer, it stopped falling and started bouncing up and down in tight range. Professional investors and traders call this “trading sideways.” It’s a sign that gold miners are trying to carve out a bottom.
On Friday, the HUI hit a three-month high. Time will tell if this is the beginning of the next big rally in gold stocks…
Delray Beach, Florida
October 13, 2015
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