9 June 2017
by Justin Spittler, Casey Research:
A huge crash is coming.
That’s what Mark Yusko is telling investors.
This is a bold call, for sure. But Yusko, who manages more than $2 billion at Morgan Creek Capital, is used to making (and nailing) calls like this.
In early 2015, he said that the price of oil would hit $30. At the time, oil was trading at around $50 a barrel…or half of what it traded for just eight months prior.
After a selloff like that, most people thought oil had bottomed. But Yusko knew better.
A year later, oil hit $27…its lowest price since 2004.
I’m reminding you of this because Yusko just predicted another crash.
Only this time, he wasn’t talking about oil. He was talking about U.S. stocks.
Two weeks ago, Yusko warned at the annual Strategic Investment Conference (SIC) in Orlando:
I’m telling you right now, the U.S. is going to have a crash and it will be massive.
• Yusko’s warning might sound familiar to regular readers…
After all, I just told you on Monday that Paul Singer thinks “all hell will break loose.”
And Singer, like Yusko, is worth listening to. He manages nearly $38 billion at Elliott Management. He was also one of the first hedge fund managers to see the 2008 financial crisis coming.
When two of the world’s top investors say a crash is coming, you better take notice.
In a minute, I’ll show you how to prepare for this coming crash. But let’s first take a look at why Yusko made his latest warning.
• The U.S. credit market is drying up…
You can see what I mean below.
This chart, which Yusko shared during his SIC presentation, shows the annual growth rate of bank loans.
When this line is rising, it means banks are issuing loans at a faster rate than they did a year ago. When it’s falling, it means the rate of loan growth is slowing.
You can see that bank loan growth rolled over a couple years ago.
• This is a major red flag…
You see, credit is the grease that allows the wheels of the economy to turn.
When credit is flowing, the economy runs smoothly. When it dries up, the gears start to grind. If this goes on long enough, an economy can enter a downward spiral.
Don’t believe me? Just look at the chart above.
You can clearly see that credit growth has petered out just before every U.S. recession since 1967.
In short, the U.S. economy will start shrinking if the credit market doesn’t improve soon.
• To be fair, recessions are a normal part of the business cycle…
They can even be healthy.
But here’s the thing. Yusko doesn’t just think that the U.S. economy’s going to have a recession.
He thinks we’re about to enter a long period of economic stagnation. That’s because the U.S. has 1) too much debt, 2) bad demographics, and 3) deflation.
According to Yusko, these “killer Ds” will cripple the U.S. economy over the next decade. And that’s exactly why you should lighten up on U.S. stocks if you haven’t already.
• That said, you shouldn’t get out of stocks completely…
Instead, you should move money into emerging market stocks. They offer much more upside than U.S. stocks at this point.
Yusko thinks so, too. He explained why in a recent interview with CNBC:
GDP [economic] growth is much, much better in emerging markets than developed markets.
The Killer Ds are what’s going to hurt the developed world over the next decade. That’s debt. That’s bad demographics. And that’s deflation.
You got the exact opposite in emerging markets. You have very low debt. You have very good, strong demographics. A lot of young people to buy stuff. And on top of it, you don’t have the deflation problem. You actually have inflation.
Emerging markets are countries on the way to becoming developed countries like the U.S. and Germany. Brazil, Russia, India, and China (aka the “BRICs”) are the four biggest emerging markets.
• Emerging markets are some of the fastest-growing economies on the planet…
You’d think that would make them great investments. But emerging market stocks have been a “dead money” trade for nearly a decade.
You would have actually lost 0.2% of your money if you owned the iShares MSCI Emerging Markets ETF (EEM) from 2007 to 2015.
The good news is that emerging market stocks recently broke out of this rut. Just look at the chart below.
It compares EEM with the S&P 500. You can see that emerging market stocks have beaten U.S. stocks by more than 2-to-1 this year.
Of course, you’re probably already sitting on big gains if you’ve been reading the Dispatch. That’s because I’ve been pounding the table on emerging market stocks all year.
On February 16, I told readers why it’s time to buy emerging markets. Since then, EEM has rallied 8%. That’s more than double the S&P 500’s return over the same period.
If you’re just tuning in, don’t worry…
• Emerging market stocks should continue to crush U.S. stocks for years to come…
But don’t take my word for it.
Take it from Grantham, Mayo, Van Otterloo & Co. (GMO), one of the world’s most respected money managers.
The firm thinks emerging market stocks will generate average real returns of 3.8% over the next seven years. It expects large U.S. stocks, aka the S&P 500, to lose 3.8% per year over the same period.
[Real returns are returns adjusted for inflation. They’re a better way to measure how much your “purchasing power” will change over a period of time.]
• Here’s what you need to do as an investor…
Lighten up on U.S. stocks. Get rid of your weakest positions first. Companies with too much debt and falling profits should definitely get the ax. You should also get out of any companies that need a healthy economy to make money.
If Yusko’s right, these kinds of companies could soon struggle to pay their bills.
Consider buying emerging markets. The easiest way to do this is with a fund like EEM. Once you’ve built a core position in emerging markets, consider speculating in individual markets. Here are three of our favorites…
|Country||How to Invest|
|Poland||iShares MSCI Poland Capped ETF (EPOL)|
|Colombia||iShares MSCI Colombia Capped ETF (ICOL)|
|India||iShares MSCI India ETF (INDA)|
Keep in mind, emerging markets have been on a tear lately. So wait for a pullback before you pick up shares of these funds. Once you have a position, plan to hold it for years.
Delray Beach, Florida
June 7, 2017
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