Historians of the future will designate 2015 as the year of The Great Transition …
From zero interest rates to higher interest rates.
From the fear of inflation to the dread of deflation.
From global peace to global conflict.
And on the positive side, from left-over technologies of the 20th Century to life-changing technologies of the 21st.
Future historians will also recognize, probably long after the fact, what Larry Edelson has been telling us for over two years — that these critical transitions have been accompanied by escalating global conflicts in multiple venues:
1. Money wars: Governments waging wars with printed money to ward off the collapse of currencies, the collapse of nations, and the dismemberment of international alliances … to fight deflation, debts, and defaults … to overcome unemployment, poverty, and popular rebellion.
2. Economic wars: Major battles waged with economic sanctions, trade blockades, asset freezes, plus cyber-spying and cyber-attacks — between East and West, between governments and foreign extremists, and also between governments and their own people.
3. Terror wars: Rampant bloodshed and unprecedented horrors on every continent except Antarctica. On every day of the year except February 30th. In every way imaginable and unimaginable.
4. Three-way wars: Unlike most of World War I, World War II or the Cold War, this time we see the emergence of a three-way global conflict among …
* the “West” — the U.S., Western Europe, and their closest allies,
* the “East” — Russia, China and their cohorts, plus …
* the jihadists — in the Middle East and Africa … in Western Europe and the Russian Federation … in South Asia and Southeast Asia.
Who are the losers and who are the winners?
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Loser #1: Government Puppeteers
Government officials seem to be born and raised with the grandiose illusion that, like master puppeteers, they can control our destiny by manipulating — even fine-tuning — their levers of military and economic power.
The year 2015 has proven them wrong. Even the world’s richest or most well-armed governments have been unable to slow the pace of events — let alone turn them around.
Case in point: In 2015, international diplomats vigorously pursued old peace talks and new alliances. But in the final analysis, the most notable change has been the reality of more and more warring parties jumping into the fray:
Turkey. France. Russia. Gulf nations. Just to mention the main ones.
Also in 2015, central bankers have tried everything they could to stop the spreading deflation, forever postponing the end of zero interest rates … or even driving them below zero. All to no avail! In fact, much like the global wars and terror, global deflation has also deepened and spread.
A coincidence? Not at all. In fact, deflation is both one of the causes — and one of the consequences — of the global conflicts. Look at it this way …
- The deeper the deflation, the greater the popular frustration and anger … which lead to protests or civil strife.
- At the same time, the greater the conflicts, the more we see deflation ravaging prices and entire economies.
This is a vicious cycle that has hit emerging markets especially hard, whether near the conflicts or not, which leads me to …
Loser #2: Emerging Markets
Brazil, for example, has flip-flopped from a miracle economy to a basket case. Its service sector, once robust, suffered its largest fall since early 2009. Overall economic activity fell by 3% in 2015 and is expected to fall by another 3% in 2016.
And a massive corruption scandal, which began with Brazil’s oil giant Petrobras, has now spread fear to the boardrooms of dozens of the country’s largest corporations.
Result: EWZ, the once-high-flying ETF that represents Brazil’s largest companies, has suffered a long-term plunge from over 99 to a recent low of 20 — a wipe-out decline of almost 79%.
South Korea, recently a darling of global investors, has suddenly been cast as one of the dogs. Youth unemployment has crept up to record highs. The working-age population, which, until recently had made South Korea an export powerhouse, is shrinking. And among Korea’s elderly, poverty is the worst of all 34 countries that belong to the Organization for Economic Cooperation and Development (OECD).
For all these reasons — and more — EWY, the ETF specialized in South Korea’s blue chips, took a beating in 2014, rallied, and took an even bigger beating in 2015.
Malaysia, another recent “miracle” economy, has been hit even harder: Its currency, the ringgit, crashed to its lows of the late 1990s. Its central bank, desperate to prevent an even more dramatic currency crash, depleted foreign currency reserves.
Adding corruption to the mix, the government’s giant investment fund — 1MDB — came under investigation over allegations of a massive misappropriation. The biggest blow of all: The global oil-price plunge, gutting Malaysia’s largest source of revenues.
So it’s no wonder that the ETF devoted to Malaysia’s leading stocks has also been smacked down, busting through four years of lows.
But it’s Russia that currently worries me the most — both for the sake of its own people and the rest of the world.
If Russia’s economic swan dive could be blamed exclusively on its showdown with the West — sanctions, countersanctions and just last week, a renewal of those sanctions — you could argue that, once politicians on both sides come to their senses, a big rally might be in the offing. Alternatively, if you could pin it all on the oil-price slump, you might argue that, as soon as oil markets turn, all would be fine.
The reality, however, is that, in 2015, Russia was dragged down by both of these simultaneously. And both are megatrends with no signs of ending: The anti-West propaganda machine in Russia is now fully entrenched, making it almost impossible politically for the leadership to reverse course. And even if oil markets started recovering today, it could take years for Russia to recoup lost revenues.
Bottom-line: Russia is trapped in a Great Recession that could be deeper and longer lasting than what the U.S. witnessed between 2008 to 2013.
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Loser #3: Western Europe
As Larry Edelson explains …
“Almost everyone I talk to thinks the European sovereign-debt crisis has passed. They say Greece’s bailout fixed the problem. Europe is on the mend, they say.
“But as far as I’m concerned, nothing could be further from the truth.
“The proof is in the numbers. Before the Greek crisis flared up, debt-to-GDP in Greece stood at 113%. Today, Greece’s debt-to-GDP stands at a tad north of a whopping 177%.
“In Spain, pre-crisis debt stood at 40% of GDP. Today it’s more than 97%.
“In Italy, it was 106%. Now it stands at 132%.
“In France, it was 68%. Now it’s 95%.
“Even Germany’s debt-to-GDP is worsening, leaping from almost 67% in 2008 to almost 75% today.
“In each and every case, debt-to-GDP is worse than it was at the beginning of the crisis — and austerity measures are literally causing the entire European continent to implode.
“All of this continues to create some of the worst unemployment we’ve seen in modern times.
“Each and every one of these countries is in hock way over its head. And each and every one of them is in the depths of a nightmare caused by austerity measures.
“Unemployment in Greece is at 25.6%. Spain: 22.5%. Portugal: 12.4%. Belgium: 8.6%. Italy: 12.7%.
“Unemployment among youth (under 25) is still off the charts. In 2015, nearly 3.2 million young persons were unemployed in the eurozone, an unemployment rate of 22.5%.
“The lowest rates were observed in Germany (7.1%), Malta (10%), Estonia (10.1% in May 2015), Denmark and Austria (both 10.3%).
“And the highest rates were seen in Greece (53.2%), Spain (49.2%), Italy (44.2%) and Croatia (43.1% in the second quarter 2015).
“Corporate and personal bankruptcies surged. Social discontent is on the rise again. And tensions between countries within Europe are higher than ever.”
Other big losers: Oil prices, energy stocks, junk bonds, and more. But let’s not forget the other side of the coin …
Winners: Select Technologies
Highest quality U.S. stocks — especially in select technology companies — were among the biggest winners of 2015.
Just as we anticipated, fear of conflict and deflation overseas drove massive amounts of flight capital to the U.S. dollar and the U.S. stock market. That money, in turn, chased the best and safest investments available.
Indeed, as we revealed early in the year, the one broad stock sector that has historically been the single best performer when energy markets collapse is technology.
On average, technology stocks have surged 64% during major oil-price declines, plus another 35.1% within 12 months after oil prices hit bottom.
And it makes all the sense in the world: Consumers and corporations save fortunes on energy. So they promptly shift those resources to the one thing that can most efficiently improve their lives or their business — hardware and software.
Also early in the year, we drilled down deeper and demonstrated that, in the world of technology, the single subsector that had the best performance of all was software and related services — up 77.5% during the oil-price decline and up another 49.9% twelve months later.
And we followed up by revealing a new techno-megatrend few people were talking about — mobile communication apps that are threatening to blow away Gmail, Facebook, and even Skype — to communicate and network instantly by exchanging text, images, voice, video and more.
For example, looking at my own iPhone, I see that …
* Most of my U.S. and Latin American contacts are on WhatsApp. In early 2009, the company didn’t even exist. Now, just six years later, it has more than 700 million users and has been acquired by Facebook for $19 billion.
* Most of my China contacts are on WeChat (Weixìn in Chinese) — another text and voice messaging app that was just released four years ago and now suddenly has almost a half-billion registered users globally.
* Meanwhile, most of my contacts in the Philippines, North Africa and the Middle East are on Viber. So I decided to use that one too. Number of users: Another 400 million worldwide!
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At this point, I figured I had pretty much all my bases covered — apps with nearly 2 billion users combined … until, that is, I went to visit my son at his workplace in Tokyo. His associates promptly persuaded me to download LINE, which has had the fastest growth of all.
It was launched in Japan in 2011. Within just eighteen months, it had 100 million users. Six months later, it doubled to 200 million. And now it has close to 600 million users worldwide, more than the total population of Japan, the United States and Russia combined.
Looking further ahead, we see similar techno-revolutions coming in
- Driverless cars, as Google seeks to team up with a major U.S. automaker like Ford.
- Mobile everything, as three billion people access the Internet through mobile devices.
- The Internet of Things, as nearly every thing in our life gets connected to almost every other thing.
- Drone technology, now available for purchase with just $50, $150, or $350.
And many more.
My point is simple. Throughout this year, despite market ups and downs, and despite a series of external shocks, U.S. investors had the opportunity step outside the fray, breathe some fresh air, and stake out very profitable positions in choice companies.
But the opportunities — and dangers — coming next year could be even more intense, the subject of my upcoming edition of January 4th.
See you then. And I trust you’re in a quiet, or not-so-turbulent location to enjoy a Happy New Year!
Good luck and God bless!