Major world economies are slipping into recession…
Canada officially entered a recession on Monday. (A recession is when an economy shrinks two quarters in a row.)
Its economy shrunk 0.8% in the first quarter…and another 0.5% in the second quarter.
The oil crash is hitting Canada hard. A barrel of oil costs less than half of what it did a year ago. Oil makes up 27% of Canada’s exports.
• Brazil is in a recession…
Brazil is in its worst economic downturn since the 2008 financial crisis.
The country’s stock exchange has fallen 26% over the past year. The Brazilian real has plummeted 36% against the US dollar in the past year, too.
Brazil is the world’s seventh-largest economy and its second-largest iron ore exporter. Plunging demand for commodities like iron ore is slamming Brazil. The price of iron ore has plummeted 70% from its 2013 peak.
• Australia could be headed for its first recession in twenty-five years…
Last quarter, Australia’s economy barely grew. Its GDP growth was just 0.2%…less than half of what economists expected. And the Australian dollar has plummeted 22% against the USD since last September.
Australia is facing the same problems as Canada and Brazil…low demand for commodities. Australia is the world’s largest iron exporter. It’s also the world’s biggest coal exporter. The price of coal is down 40% since 2011.
• A slowing China is slamming these countries…
China is the world’s largest commodity consumer. In the first quarter, its economy grew at its slowest rate in 25 years. And there are signs that things could get much worse. Last month, China’s manufacturing output index had its lowest reading since 2009.
Things in China are so bad that some financial experts are now saying it could drag the entire world into a recession. This would be a first. For the past couple decades, the US was the only economy big enough to cause a worldwide recession by itself.
The Wall Street Journal explains…
Historically, the U.S. has been the single largest contributor to global growth, and a contraction in the American economy has been the catalyst that tipped the world into recession…
This decade China has accounted for a third of the expansion in the global economy, compared with 17% from the U.S.—a role reversal of the preceding decade. The contribution from the other giant economies—Europe’s and Japan’s—has fallen to less than 10%. So the key to global growth is now in Beijing’s hands.
On Wednesday, the International Monetary Fund (IMF) said it may make a big cut to its worldwide economic growth outlook. The IMF is worried about China’s slowing economy and crashing stock market.
We recently explained that the MSCI All-Country Index, a broad measure of the global stock market, fell 6.8% in August. It was the worst month for global stocks since 2012.
• The “Bond King” thinks we have bigger problems than China…
“Bond King” Bill Gross thinks global financial markets are “out of whack.”
Gross founded Pacific Investment Management Company (PIMCO) in 1971. Under his watch, PIMCO became the world’s biggest bond fund. Today, Gross runs his own bond fund at Janus Capital.
Gross thinks almost everything is expensive right now. In a letter to his clients published Wednesday, he wrote that “equity market capital gains and future returns are likely to be limited if not downward sloping.”
In other words, investors face a ton of risk right now…and not much opportunity.
Even though interest rates are close to zero, Gross still thinks investors are better off holding cash than overpriced stocks or bonds.
He blames the Federal Reserve’s easy money policies for warping the economy:
The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long term productivity – the decline of which we have seen not just in the U.S. but worldwide.
Gross explains that the past six years of near-zero interest rates have created a “Frankenstein” economy. He blames cheap credit for inflating both stocks and bonds to the point where there’s nothing attractive to buy right now.
Gross is right. Artificially low rates have detached financial markets from reality…
Interest rates aren’t just some number for the government to tinker with. When they’re not manipulated, interest rates help people make smart financial decisions.
For example, if you have an idea for a business that will earn 3%…but it costs 7% to borrow money…you know not to borrow money to start that business.
But the government has destroyed this signal. With interest rates at effectively zero, borrowing money is virtually free. So nothing looks like a bad purchase.
Since borrowing is ridiculously, laughably cheap, no business idea is too dumb to fund…no $120,000 car goes unsold to someone who can’t afford it…and no overpriced house sits on the market for more than a month.
The old question of “Does it make sense to borrow this much money?” has been replaced with “How much can I get?”
Cheap credit has stoked the economy, stocks, and the housing market. Zero interest rates have distorted prices so badly that we can’t even know what prices would be if interest rates were normal. For most of the ’80s and ’90s, interest rates were 5% to 10%.
We’re now Alice in Wonderland…where reality isn’t what it seems.
• Because almost everything is overpriced, there’s very little upside in stocks and bonds right now…
But gold stocks are a different story.
Gold mining stocks are some of the cheapest assets on the planet right now. The HUI, an index that tracks gold miners, is down 83% since 2011.
These stocks will likely skyrocket when the next gold bull market begins. That’s because miners are leveraged to the price of gold. When the price of physical gold goes up, gold stocks usually go up way more.
The chart below shows how gold stocks skyrocketed during the last two gold bull markets.
Keep in mind, the huge gains in green are averages. The best junior mining stocks did even better. It’s not uncommon for a small mining stock to deliver 20 to 1 gains during a strong gold market. One time in the ’90s, Doug Casey made over 26,000% on a single gold miner.
The secret to these huge gains is timing. The best time to buy gold stocks is after a bad bust…like the one we just had. Now is the ideal time to get in on the best gold mining stocks.
Louis James, editor of International Speculator, knows the junior mining industry better than anyone on the planet. Louis knows the geology. He’s on a first-name basis with the major players. And he’s constantly traveling around the world to find the next big deposits.
You can learn Louis’s favorite gold mining stocks – most of which have potential to rise 5 to 1 or even 10 to 1 – by taking a risk-free trial to International Speculator.
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Chart of the Day
China has been the world’s growth engine for the past decade. Companies and people in China took on a lot of debt to pay for this giant growth spurt.
Now China’s economy is slowing…but companies and people in China are still borrowing.
Today’s chart shows the growth in China’s debt over the past ten years. As you can see, China’s debt has exploded since the financial crisis.
It’s difficult for an economy burdened with huge debt to grow fast. With China’s household and corporate debt now above 200% of GDP, it’s not surprising that China is growing slower than it has in 25 years.
Delray Beach, Florida
September 03, 2015
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