Emerging Markets in Contrast to US Stocks

Businessman holding the world in the fingers

Uranium is heading for its longest run of monthly gains since November 2014 as global supply tightens after mine closures and as producers and investors boost purchases in the spot market.

Spot uranium is up 2.1 percent this month, set for a fourth monthly advance, and has climbed more than 30 percent since hitting a low in April. A decline in supply and boost in demand has helped underpin a price increase, according to Ux Consulting Co., a provider of research on the nuclear industry. Further gradual gains are seen through the remainder of the year, Ux said.

‘…Kazakhstan, the world’s biggest producer, is cutting output further this year, while Australia’s Paladin Energy Ltd. and Canada’s Cameco Corp. have halted operations, with Cameco seeking uranium in the spot market to fulfill contract obligations. Yellow Cake Plc, a venture created this year to purchase and hold the fuel, this month said it had increased its stockpile to 8.4 million pounds.

Bloomberg, 31 August 2018

As the article quoted above explains, the ground is shifting in energy markets.

What was once a heavily oversupplied uranium market is moving quickly toward undersupply. Major producers are cutting production or closing mines altogether. And as I’ve explained to readers of Crisis & Opportunity previously, London-listed Yellow Cake Plc is in the market stockpiling uranium to await higher prices.

And higher prices is exactly what is likely to result from all this. When the big price moves might start is anyone’s guess. But history suggests that uranium can indeed move very quickly once shortages start to become more widespread.

The charts of all three of our Crisis & Opportunity uranium picks look good. They are in solid upward trends. One recently broke out to a fresh 12-month high.

It was also good to see a major investment management firm emerge as a substantial shareholder earlier this year. I can’t say who, for fear of giving away a recommendation my subscribers have paid for. But it has an exceptional long-term track record and often takes large positions in these sort of situations.

Let’s hope they’re right again here. (I think they are!)

The great uranium comeback: Discover how you could take advantage of the next big resource rush today. Download free report now.

Emerging markets watch…again

Over the past few months I’ve often brought up the performance of emerging markets in 2018 and how they are a sharp contrast to the performance of US stocks.

Here is a chart from late last month, showing the divergent performance between emerging markets and the S&P 500.

MoneyMorning 01-10-18

Source: Optuma
[Click to open new window]

For that reason I was interested to read Russell Napiers’ comments on the recent emerging market’s crisis. Napier is a very astute macroeconomist. He’s worth listening to.

Napier’s piece, courtesy of Zerohedge, states that the problem facing emerging markets is that the inability to inflate away large debt levels has given rise to the ‘strong man’ and the demise of the rule of law. In such an environment, capital will flee.

Napier says these strong men are:

Duterte, Erodgan, Xi, Orban, Amlo, Maduro, Putin, Kaczyniksi, and Manangagwa — amongst others. Few if any strong men can ultimately strengthen the rule of law that is ultimately the only protection for investors. In strengthening the law, they weaken themselves.’

He’s referring to the leaders of the Philippines, Turkey, China, Hungary, Venezuela, Russia, Poland, and Zimbabwe.

The reason why debt cannot be so easily inflated away, Napier says, is because an increasing amount of that debt is now denominated in US dollars. As I pointed out in the August issue of Crisis & Opportunity, US dollar debt outside the US is now at an incredible US$11.2 trillion.

Foreign central banks can only print their own currency, not US dollars. But if they do this and their currency falls in value, it makes servicing US dollar debt harder. So printing currency in this situation is actually deflationary, rather than inflationary.

What can be done?

Default is one solution, particularly if one has the luxury of defaulting on a foreigner, or sequestration of private wealth under various guises is another. Given the need for such extreme measures when countries fail to inflate away their debt, it should be no surprise that the rule of law is on the ebb and the rule of the strong man is creeping in.

Of course, investors have found themselves threatened with sequestration before in times of crisis in emerging markets. However, in recent decades they have always had the foot soldiers of the IMF to intervene on their behalf. For a generation the IMF conditions for large bail-out loans enforced private property rights and enforced economic policies that would ultimately be to the benefit of both local and foreign investors. Now the IMF has changed its mind.

Napier says that the IMF will potentially impose capital controls, presumably to stop a run on the domestic banking system. This will ‘incarcerate’ capital.

Investors need to fear the strong man, but they also increasingly need to fear the IMF. Their role as sheriff, protecting property rights in emerging markets from the 1980s onwards, significantly reduced the risks for portfolio investors and encouraged capital inflows. Today they stand ready not to protect capital but to incarcerate it. 

That will come as quite a shock to the owners of portfolio assets who believe that there will always be a global policy response that is positive for asset prices. Generations of investors considered policy makers to be the enemy of capital but now, apparently, they are its saviour. When the IMF gets to its ‘road to Damascus’ moment, it will send a profound shudder through a generation of players/investors conditioned to believe that this referee was on their side.

As if on cue, an article popped up in The Australian Financial Review shortly after, pointing out how global debt levels had increased from US$97 trillion in 2007 to US$169 trillion today.

That’s around 2.5 times the size of the global economy, and a lot of that growth has occurred in emerging markets.

We’ve discussed Turkey’s debt problems recently. Argentina is in worse shape. According to Fitch/Bloomberg data, Argentina had US$489 billion in total debt as at September 2017. I can’t find what percentage of that is in US dollars, but obviously it is enough to cause investors to panic.

Last week, the Argentinian peso hit all-time lows versus the dollar. Official interest rates are at a crippling 60%. Back in June, the IMF readied a US$50 billion ‘bailout’ package for Argentina which now looks like it’s being activated.

This is a shame for Argentina. IMF bailouts are usually brutal on the population and only bail out bankers, not the people who need it most.

How US Fed rate rises hurt Europe

The key takeaway here is that ongoing interest rate rises by the US Federal Reserve will continue to hurt emerging nations. US denominated debt burdens and falling currencies versus the US dollar make for a painful combination.

It’s simply a question of how long this pain takes to flow through into more developed economies. From what I can tell, the European banking system is most exposed to emerging markets.

So the pain is likely to surface in Europe first.

Have a look at the major European indices. Unlike US stocks, they are not breaking out to new, all-time highs.

Spain’s stock market is by far the shakiest (see below). It peaked in 2017 and is close to hitting its lowest point in nearly two years.

MoneyMorning 01-10-18

Source: Optuma
[Click to open new window]

The Italian stock market is also starting to break down…

MoneyMorning 01-10-18

Source: Optuma
[Click to open new window]

The German stock index failed to rally back to its January highs, and now looks like it’s breaking lower too…

MoneyMorning 01-10-18

Source: Optuma
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And finally, we have the French stock market. While it is healthier than the other major bourses, it appears to be struggling.

MoneyMorning 01-10-18

Source: Optuma
[Click to open new window]

All this suggests that Europe is not well, and certainly not as strong as the US economy. Perhaps it’s a combination of emerging market exposure and the coming end of European quantitative easing?

Whatever the case, it bears watching.

US stocks are the only major asset market in the world hitting all-time highs. This is not a broad-based bull market and for that reason you need to remain cautious. Also, keep in mind we are heading into a traditionally volatile period for markets around the globe.

In short, we need to look ahead and make decisions on what might be, not what has been and what is now.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

PS: Revealed today: How Aussie investors could cash in on uranium’s next blockbuster breakout. Free report available now.

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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