The BRIC countries (Brazil, Russia, India, China) were the hot investment play a while ago, and now they are again. Hot money needed a home and has found one in the emerging markets.
What is driving the money flow to emerging markets?
Two things:
1. Wall Street’s belief in an economic recovery.
The Street wants the market to go up, and the phrase de jour is “green shoots.”
Plus, the Street is looking to a positive GDP number in Q4 — a statistical certainty — and the “second derivative,” i.e., the rate of decline is slowing.
I don’t think we’re out of the woods yet. This rally is not sustainable, but the trend is very strong, so don’t try to fight it.
2. Fake Chinese data.
The problem with the most influential of the BRIC countries, China, is the total fiction they make of data that enables investors to track fundamentals of the economy or individual companies.
Simply put, how do you know a Chinese government official is lying when discussing the economy? His or her lips are moving.
But there’s some data they can’t lie about.
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Banking data — many of the banks are publicly held here and in other real stock markets — must be close to the truth.
And, in Q1 2009, state banks loaned more money than they did in all of 2008. Much of that money is under mattresses, went into the stock market or went to build more industrial capacity that will sit unused.
How to Invest in the Emerging Markets
Our fake rebound plus their fake rebound means three things:
1. Treasuries are tanking in expectation of inflation. (Find out how to play this.)
2. Commodity prices are rising as the U.S. dollar falls alongside Treasuries.
3. Because the BRIC countries produce a lot of commodities, a second wave of money is heading their way.
How long will all this last? Long enough to create another bubble.
So play the trend short term by going long now, but be ready to short emerging markets once they blow up.
What stocks should you buy for the short-term play? Check out Enter the Dragon: 8 China and Emerging Markets Plays.
Michael Shulman is the editor of ChangeWave Shorts. To learn more about him, read his bio here.
