For the last few months, I’ve been watching money pour out of riskier assets. However, the outflow of money really just caused the uptrend in many riskier assets to turn into pronounced sideways trends.
But now, these assets are starting to turn down. What ones am I talking about? I’m talking about things like copper, oil, gasoline, the CRB index, etc. Then it spilled over into stocks like the Shanghai Composite Index in China.
After that, it spread to Australia’s stocks and now it has hit U.S. stocks. We haven’t resumed our bear market just yet here in the U.S., but it may not be that far away.
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However, there’s one group right now that I think is starting to see a pronounced pullback, which is starting a new downtrend. It’s in the emerging markets.
You see, when investors start to even question whether economies are sputtering or not, they pull money out of emerging market first while they are still deciding. Then if they feel that the sky is about to fall, they pull money out of the developed markets as well.
Well, I believe that money is starting to pull out of the emerging markets.
In fact, when I chart the emerging markets compared to the S&P 500, I see that the S&P has started an official uptrend compared to the emerging markets.
In other words, both markets are pulling back right now but the emerging markets are pulling back much further and faster and its causing that chart to head higher.
That chart headed higher right before things unraveled last time and we ended up with a global recession. Whether things get that bad again or not, I still think that the outflows will continue out of the emerging markets.
It’s obvious to me right now that the global economy is slowing down a bit even though it’s not showing up in the data (which lags by a quarter or so). How do I know? It goes back to commodity prices.
If economies are expanding, they are in dire need of the commodities that it takes to build out their economies. The demand that’s placed upon them causes the price of these commodities to rise.
Right now, we’re seeing decreases in the prices of copper, oil, gasoline, agricultural commodities, etc. If an expansion/recovery was still happening, then these prices would at least be stable if not rising.
However, these prices are diving right now due to a lack of a demand being placed upon them. Therefore, I believe the data will confirm what I’m seeing in commodities now in the upcoming quarter or two.
So if the global economy is slowing and the demand for commodities is slowing, it’s going to cause money to flow out of the riskiest of assets: emerging markets
In fact, I think all of the turmoil in Europe (Greece, etc.) is going to cause a contagion that spreads to the United States. After all, think about how many U.S. companies have units in Europe.
As the European economy slows, it will hurt the production of those units and hurt the U.S. company’s earnings. As that happens, it can hurt employment in both their European units and also the American units that support those overseas operations.
This is when the outflow of money will accelerate in a major way out of the emerging markets and into the U.S. dollar. Therefore, I believe we’re about to see many emerging market currencies dive and that money run to the “safe haven” of the world’s reserve currency: the U.S. dollar
I believe this is going to be such a strong theme that continues over months to maybe a year or more that I’ll likely be instructing my Money Matrix Insider members to take some of these positions as the trade set-ups arise. (We’d be doing these in the aggressive side of our portfolio, of course).
Just remember, I sounded the alarm here first.
And for those of you who are MMI subscribers, I think you’re going to profit handsomely from this capital-flow surge.
About the Author: Sean Hyman
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