You may know the Doctor Dolittle stories.
One of the characters is the pushmi-pullyu. It’s a creature with two heads…one at each end of its body.
When the creature wants to walk, each end wants to walk in the opposite direction.
Needless to say, confusion ensues.
It’s a situation we see happening right now in the financial markets. News comes out and the market wants to go in two different directions.
Is it bad news or is it good news? The truth is it’s neither. It’s just news. And yet the market is determined to make something out of it.
What has the market fretted about most over the past few months?
That’s right, a slowing Chinese economy.
What else has the market fretted about over the past few months?
That’s right, the potential for an overheating Chinese property market.
So now what has happened? The markets are worried because China’s housing market has slowed. According to the Financial Times:
‘A report published over the weekend showed new home prices in the 70 cities tracked by the government rose 6.7 per cent in April from a year ago. In January, the annual pace of growth was 9.6 per cent.’
It’s a classic case of worrying about one thing and then worrying twice as much when the opposite happens.
The long or the short
There’s no doubt there are a bunch of risks with China.
Our new emerging markets analyst Ken Wangdong has personal experience of living and working in China. He knows the exact details of those potential problems.
But he also knows about the potential to build enormous wealth by betting on a resurgence of the Chinese economy.
You can read more from Ken in tomorrow’s Money Morning (subscribers to any one of Port Phillip Publishing’s paid investment services can also read a bonus contribution from Ken in today’s edition of Scoops Lane, out this afternoon).
The simple fact is that right now the world’s economy is going through the post-boom bust.
This is where economies and businesses expunge all the excesses of the boom. The bust can happen (generally) in one of two ways. It can either be a quick and painful affair, resulting in high unemployment, economic contraction, businesses going bust, and low interest rates.
Or it can be a long and painful affair, resulting in high unemployment, economic contraction, businesses going bust, and low interest rates.
You’ll notice they are similar.
Regardless of the length of the bust, the symptoms and the outcome are the same.
After the 2008 meltdown, governments and central banks had a choice. They could choose the long version or the short version. They chose the long version.
Economies worldwide are feeling the effects of that today, six years later.
Just as we predicted
The thing is, this shouldn’t come as a surprise to contrarian investors.
At the time we predicted things would turn out pretty much as they have. We predicted there would be a big ‘blow off’ stock rally as the stimulus and low interest rates kicked in.
That happened.
We advised investors to load up on small-cap stocks to profit from it — something we also advise investors to do today.
We also predicted that the stimulus effects wouldn’t last. We said that the market would sink again, as the stimulus merely had the effect of delaying the downturn rather than preventing it.
That happened.
We advised investors to start taking profits on small-cap stocks towards the end of 2010. We copped a lot of flak for taking that position.
Of course, it’s impossible to predict things precisely. For example, we didn’t expect US stock markets to reach record highs this soon. But in terms of everything else, contrarian and non-mainstream investors and analysts got most things right.
But now is the time to move into the next phase of this market cycle. That means considering what comes after the bust — assuming, as we do, that the bust has just about ended.
Well, this is where it gets exciting.
Breaking news: cycles are cyclical
Remember that market cycles are called market cycles for a reason — because they are cyclical.
That means the economy goes through periods of booms, busts and recoveries. Once it has gone through that cycle it goes through it again…and again…and again.
It’s as regular as clockwork and as certain as the Sun rising in the east and setting in the west.
This is exactly why we’re beefing up our team of analysts to help you take advantage of the market as it shifts from the bust phase, into the recovery phase and eventually into a new boom phase.
It’s why we hired Sam Volkering last year to work on the Revolutionary Tech Investor project. And it’s why we’ve now hired Ken Wangdong to work on a new emerging markets project.
Historically, during periods of economic recovery and boom it’s the tech sector and the emerging markets sector that tend to perform best of all. You saw that in recent years following the dot-com bust and the 2008 financial meltdown.
On both occasions these markets led the way. But over the past two years the emerging markets sector has taken a drubbing. It has gone through the bust that many predicted — including our old pal Greg Canavan.
But now our bet is that emerging markets are about to hit the road to recovery. At the moment many analysts and commentators are talking as if the entire world is about to stop dead in its tracks. But that’s not how things work.
Even in the worst of times things still happen. Economies begin to grow, and entrepreneurs and capitalists begin to invest and innovate. Before you know it the economy begins to recover and investment markets begin to rise.
Unfortunately not many people can see that at the moment. Instead, all they can see are the headlines in the mainstream press about China’s economy overheating and cooling at the same time.
For a long time the mainstream press denied that the Chinese economy could ever slow down. At the same time contrarian investors said it was inevitable.
Well now it’s happened.
Finally the mainstream can now see what contrarians foresaw years ago, and they’re now calling for China to crash. So while they’re preoccupied with predicting the crash that has already happened, contrarian investors can grasp the opportunity to invest in high growth assets at beaten down prices.
Cheers,
Kris+
