A slump is looming for the world’s developing economies, yet for the clever investor, opportunities await, writes Clem Chambers, CEO of global stocks and shares site ADVFN.com and author of titles including ‘A Beginner’s Guide To Value Investing’.
Finally an element of calm has returned to major financial markets. Currencies have stabilised. Equities are back to levels seen prior to the slump of last year. European markets are resting.
Europe and the US have successfully delayed the days of reckoning for at least another year. Meanwhile, the developing (BRIC) countries are looking on in horror, as the developed world’s lavish and unsupportable lifestyle appears more and more likely to end badly for them, too.
The old market saying, ‘never confuse your brains with a bull market,’ means never think you are clever when a strong stock market is making you money. Before 2007, the finance ministers and central bankers of the developed world did just that. They thought they were geniuses who had cracked the riddle of economics. These technocrats felt responsible for the good times because they were super smart. Yet, the bull market ended, a bear market began and, all of a sudden, the economic utopia fell apart.
None of these apparent bright minds took the blame for driving their economies into huge debt and thus creating an environment of giant asset bubbles – such as the property market. The crash, unlike the boom, became everyone else’s doing but theirs.
China, India, Brazil and Russia (the BRIC nations) have done very well over the last decade. That’s because they’re run by just the kinds of ‘geniuses’ that once were responsible for the developed world’s run of prosperity. The developing world’s bull market is in fact being driven by the giant trade deficits of the West, i.e. it’s fuelled by the mass financial incontinence of most of Europe and all the US.
A trillion dollars are getting shipped to the treasuries of the developing world via trade surpluses every year. The technocrats of the BRICs are suddenly realising this is unsustainable and about to end; the trouble being that they are now utterly reliant on it.
The developed world has ‘locked and loaded’ with either a default, or a program of turning the money they pay with into confetti. Like Leprechaun gold, all those trillions of US dollars, and likely Euros and pounds, look primed to crumble away.
Alternatively, the developed world will clamp down on its spendthrift ways in an outbreak of harsh austerity which will severely dampen the flow of cash.
In any event, the flow of trillions into the developing world from the developed looks set to suddenly sag. The spoils thus far made may well simply melt away via Western devaluation and debasement.
The current global economic balance is simply not sustainable.
When this slump hits the developing world, a bear market – which may already be underway in its initial stages – will strike. Reputations of the developing world’s ‘geniuses’ will quickly be tarnished. Then a new generation of ex-geniuses will be blaming everyone but themselves for the sudden change of fortune.
We will see a new generation of genius birthed by a bull market somewhere else. The sneaker-wearing geniuses of Silicon Valley are now back, for example, having been widely viewed as the dumbest guys on the block after the dotcom crash.
Investors shouldn’t confuse a bear market with brains either. It’s always a good idea to buy when prices are low, rather than when they are high.
When the central bankers and finance ministers of good, stable economies appear to be a pack of monkeys, it’s the time to look for opportunities. In the end, the best way to make money is to buy in a bear market and sell in a bull.
You will look foolish to others at both moments, when you get in cheap and you sell out early for a fat profit. When you buy, everybody thinks you should be selling and when you sell, everyone is desperate to buy; yet the fate of those that look smart when times are great is best avoided, unless, like the Silicon Valley geniuses, they are selling, too.