Did the big banks engineer this ‘contagion’?

banker xOne of the best opportunities I ever encountered was in 1997. It was when emerging markets collapsed after the Asian Financial Crisis. Stocks in markets like Indonesia, Thailand and Turkey fell by more than 50% almost overnight only to recover within a few months. It was one of the best examples of panic selling I have ever seen.

You see, emerging markets are illiquid. What this means is that there is a lot of money chasing very few stocks and that creates tremendous volatility both on the upside and the downside.

Right now, we might be seeing the beginnings of one of those moves down and that will set up for a huge move higher.

Consider that the market capitalization (number of shares times price) of all the publicly traded companies in markets like Indonesia, Thailand, Argentina and even Turkey combined are less than that of Exxon Mobil and you can understand how little money it takes to make these markets rock and roll.

Over the past few weeks we have seen three significant events that point to turmoil overseas. The first came from Argentina, which devalued its currency by more than 30% overnight. This means that Argentina is likely headed for a recession, as prices of goods and services will escalate. This was followed by a super strong hike in interest rates by more than 400 basis points overnight, which sent Turkish stocks plunging. Imagine if the US Federal Reserve hiked rates form the current 0.25% to 4.25% overnight? Turkey did this to bolster its sagging currency but the fallout will be felt by consumers with any types of loans and will put a damper on Turkish commerce in the short term. Then South Africa did the exact same thing and raised its rates as well.

Emerging markets act like a line of dominos. When one falls, others tend to follow. It’s not because one affects the other directly, but it’s because of something that market followers have called “contagion”. In reality it’s a way for the Bankers on Wall Street to make a lot of money, fast.

They know that emerging markets are not going to shut down. After all, these are all countries that are experiencing growth that’s historically faster than the developed world. On top of that, they are markets that buy lots of goods and services from the developed markets like the US and Europe. Bad news for emerging markets puts everyone in a sour mood. So here’s the script:

Emerging markets start to crash. The Bankers all get together and start pouring on the bad news about loans coming due, budget deficits, trade imbalances, corruption in the government and whatever else they can throw in. This begins to cause a panic, throwing more gasoline into the fire as smaller investors and institutions begin to bail out en masse. That makes prices plunge even faster, which is just what they wanted. The result is a major sell-off in all markets and that spells massive opportunity if you know what to look for and where to look for it!

That’s when the real fun begins because you as the knowledgeable investor know that this whole thing is a charade and as soon as the sentiment turns, and it always does, these markets are heading back up. And now there are specific vehicles that you can invest in as quickly as the big boys to take advantage of the upturn. In the next issue I am going to show you two ways to buy into the upturn before it happens and how to know when the time is right for the biggest moves. First, sit back and enjoy the panic. If this is a real meltdown, we’re just in the early innings!

To your wealth,

Banker X.

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