More Proof That This Bubble Is About to Pop

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 The latest data suggest the boom in auto sales has already peaked…
 
This week, U.S. automakers reported big declines in April sales. As Bloomberg reported…
 
Sales at all six of the biggest automakers in the U.S. dropped again in April, with Ford Motor and Honda Motor posting the steepest declines – about 7% each…

The annualized pace of U.S. auto sales, adjusted for seasonal trends, slowed to 16.9 million in April, missing analysts' average estimate for 17.1 million. A year ago, the selling rate was 17.4 million.

Industrywide deliveries are down 2.4% so far this year compared to the same period last year, according to researcher Autodata Corp. The four-month slump reinforces estimates for the U.S. auto market's first annual contraction since 2009, the year GM and Chrysler reorganized in bankruptcy court.

Auto sales have now surprised to the downside for four straight months after setting an all-time record in 2016.
 
Meanwhile, subprime auto loans are going bad at a frightening rate. As we noted in the March 23 Digest
 
According to credit-ratings firm Fitch, delinquencies of 60 days or more on these loans are now well above 5%… And they're quickly closing in on 6%. As you can see in the following chart, these loans are going bad faster than they did during the 2008-2009 financial crisis…
 
 This is no coincidence…
 
Subprime lending stimulated the latest boom in auto sales. Auto lenders – including the financing arms of the "Big Three" U.S. automakers themselves – pulled out all the stops to keep the party going…
 
They extended financing terms as far out as 96 months – eight years! – and they've pushed deeper and deeper into subprime territory, offering cars to folks with worse and worse credit.
 
But now, lenders are suddenly pulling back. As the Wall Street Journal reported this week…
 
Wells Fargo, one of the largest U.S. auto lenders, last month reported a 29% fall in its auto loan originations for the first quarter from a year earlier. The decline, the biggest for the San Francisco-based bank in at least five years, was part of a common refrain in quarterly announcements from lenders including JPMorgan Chase, Ally Financial, and Santander Consumer USA.

Bankers' caution is increasingly showing up in car sales, which Tuesday came in worse than expected for April. The declines are mostly occurring in lending to riskier borrowers, in particular those with low credit scores, where lending had ramped up for years…

Some banks, including regionals Fifth Third Bancorp and Citizens Financial Group, are beginning to retreat from higher-quality "prime" auto loans as new risks emerge. "It's been an overheated sector," said Fifth Third Chief Executive Greg Carmichael. "The auto business just isn't as attractive right now."

 In other words, lenders are beginning to tighten credit in response to rising stress in subprime auto loans. And this is already causing a dramatic decline in auto sales.
 
This should sound familiarIt's exactly what Porter has been predicting for months.
 
But this trend is far from over. As Porter and his team explained in the February issue of Stansberry's Big Trade
 
The data are clear… We've had a spectacular auto-lending and leasing boom. Fewer and fewer people are paying cash for cars anymore. Today, about 80% of new cars are either financed at the dealership or leased. That's up from roughly 60% 10 years ago.

And as you might expect, this surge in auto lending and leasing has fueled a car-buying bonanza. New-car and light-truck sales are running at around 17.5 million vehicles a year in the U.S. During the last recession in 2009, that rate had dropped to around 10 million.

All of this lending and leasing activity – aided by low interest rates – has played a big role in the dramatic auto-industry recovery since the credit crisis.

But there's a problem… The U.S. car market has always been highly cyclical. As you can see in the chart below, the auto industry regularly jumps between sales booms of more than 15 million and busts of less than 11 million.

 

The auto-lending and leasing boom over the past few years has set the auto industry up for yet another bust.

 
 In the meantime, on the other side of the world, Steve Sjuggerud sees an unusual opportunity for investors today…
 
"The upside potential is dramatically greater than buying stocks in 2009 or buying real estate in 2011," Steve told our readers during an emergency briefing Wednesday.
 
Of course, if you joined us for the live event, you know he was referring to Chinese stocks. And if you know anything about Steve, you know he doesn't make statements like that often…
 
After all, he called the 2009 bottom in U.S. stocks almost perfectly. He even borrowed money – for the first and only time in his life, via a home-equity loan – to buy stocks. Then in 2011, he turned bullish on real estate, telling readers it was "the best time in history to buy a house."
 
Each of these situations were what Steve calls a "fat pitch"… an opportunity where the odds are stacked so heavily in your favor, it's simply too good to pass up. And readers who took his advice have done incredibly well…
 
The broad market – as represented by the benchmark S&P 500 Index – has more than tripled since Steve's 2009 call, while many individual stocks have done far better. And median U.S. home prices have risen nearly 50% since 2011 to a new all-time high.
 
Yet Steve says the opportunity in Chinese stocks today is more certain – and has substantially higher upside potential – than either of those previous examples.
 
 Why? In short, a "perfect storm" of sorts has come together…
 
China is the world's second-largest economy and the world's second-largest stock market… yet virtually no one is invested today. To borrow Steve's favorite investment mantra, Chinese stocks are cheap and hated… and they've quietly started an uptrend.
 
Meanwhile, a once-in-a-lifetime event is guaranteed to cause as much as $1 trillion to flood into Chinese stocks over the next several years. And this catalyst could be coming in a matter of days.
 
Steve says folks who buy the right Chinese stocks now could easily and safely make five times their money or more over the next few years… And he's practically begging all Stansberry Research subscribers to put at least a little money into this opportunity immediately.
 
Unfortunately, we're not able to offer a replay of this week's emergency briefing. So if you weren't able to join us, it's too late to see Steve's presentation in full. But it's not too late to take advantage of this incredible opportunity…
 
For a limited time, you can still get all of Steve's China research and recommendations at a massive discount from the usual subscription cost.
 
Better yet, Steve is so sure of this opportunity, he's even including an unheard-of guarantee… If his big prediction doesn't happen before the end of your initial subscription term, he'll give you an entire bonus year of his work – valued at $3,000 – absolutely free.
 
Click here to take advantage of this special, time-sensitive offer.
 
Regards,
 
Justin Brill
 
Editor's note: During an emergency briefing this week, Steve did something we hardly ever do… He offered a unique guarantee to anyone who signs up for his True Wealth China Opportunities newsletter within the next few days. In short… if his China prediction doesn't pan out, he'll essentially write you a check for $3,000. Get the details here.
 

Source: DailyWealth

A Serious Warning About the Coming Collapse in Corporate Credit

Steve's note: Longtime readers know I expect U.S. stocks have plenty of room to run. But my friend and colleague Porter Stansberry has a different take on the market. Yesterday, he shared why he believes a commodities bubble could trigger the next financial crisis. Today, he'll explain why, thanks to the central banks, that potential crisis could be more severe and widespread than any we've seen before…
 
Listen to this warning…
 
The next financial crisis won't be like any other you've ever seen.
 
It won't just hit the commercial banks. It will hit the central banks. And there's no one to bail them out.
 
This is a fact…
 
The Swiss central bank owns more shares of Facebook than Mark Zuckerberg, the company's founder.
 
That means when the world's wealthiest, most conservative, and most risk-averse investors open a Swiss bank account to hold the world's best currency – the Swiss franc – they're really buying U.S. stocks.
 
In 2016 alone, the Swiss central bank ownership of global equities grew by 41%. The Swiss central bank now owns almost $500 billion worth of equities in markets around the world. That makes it one of the 10 largest investors in the entire world – a tiny country of just over 8 million people.
 
The U.S. stock market is approaching an all-time high level of valuation. Only the '29 bubble and the 2000 tech bubble saw the S&P 500 Index trade at a higher multiple of earnings. (Stocks are now trading at 25 times last year's GAAP earnings.)
 
Stocks are now essentially more expensive than they've ever been before.
 
And who is buying at these levels? Central banks.
 
Central banks began buying stocks because they virtually ran out of bonds to buy. Said another way, once they bought so many bonds that interest rates fell to zero, they simply couldn't buy any more. To continue their "free money" policies, they had to continue to expand their balance sheets. They've done so by buying massive quantities of stocks, all around the world. For example, the Japanese central bank now owns more than 10% of every single company in the Nikkei index and is the largest owner of more than 55 different companies.
 
The central banks' move into equities is even more dangerous than most people realize.
 
You see, they've funneled their buying into indexes to minimize the costs. As a result, the majority of these tremendous inflows have been channeled into the 10 largest stocks that trade in the U.S.: Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Berkshire Hathaway (BRK-A), ExxonMobil (XOM), Johnson & Johnson (JNJ), JPMorgan (JPM), and Alibaba (BABA).
 
These shares are up around 30% over the past year, compared with around 15% for the S&P 500 as a whole.
 
So… the central banks aren't merely buying at the top… They're concentrating their investments and following an investment strategy that's completely mindless.
 
What could possibly go wrong?
 
The world seems to have forgotten that currencies are supposed to be unchanging units of measurement.
 
It's critical to a healthy economy to have a sound currency that's NOT volatile. The key to generating investment capital (which is necessary to grow productivity and wealth) is a fair playing field, where the rules and values aren't always changing.
 
Over the past few years, the volatility of currencies has soared. Today, bitcoin is less volatile than the British pound. Does that sound normal to you?
 
The soaring volatility of currencies, along with the diminishing volatility of the world's stock markets, is a direct result of the central banks' equity buying. As long as the central banks supply a never-ending "bid" for stocks and continue to stuff their balance sheets full of financial securities, the world's traders are going to treat their currencies like stock index funds – because that's what they've become.
 
Central banks' free-money policies have now permanently linked the value of every currency in the world to value of the stock market.
 
As a result, governments have turned the global economy and the value of every currency in the world into ticking time bombs.
 
The next panic in the stock market won't merely hurt stock investors.
 
The next panic will hurt every human being on the planet… because every currency in the world is now tied to stock and bond prices.
 
The central banks haven't merely wrecked the world's currencies… They've warped our political systems, too. Although it's probably hard to believe, these changes are the most dangerous aspects of what's happening right now.
 
But… I don't want today's essay to be completely theoretical…
 
These big, macro themes have important, near-term implications…
 
The most critical one to understand right now is how the free-money policies have led to a huge bubble in corporate credit.
 
A virtual tidal wave of corporate debt is coming due over the next three years.
 
This pile of debt is lower-rated overall and contains more "junk" issuance than any other corporate-debt cycle in history. When I talk about how commodity prices and the credit structures that surround commodity production are the weak link in the central bankers' free-money policies… I'm talking about the coming huge defaults in corporate credit.
 
With default rates already hitting 5%, it seems clear to most corporate-debt analysts that this default cycle is going to be a "doozy," with losses for investors approaching 40% of junk issuance, at least.
 
That's $1.5 trillion to $2 trillion in potential losses in the next four years.
 
Recently, my colleague and DailyWealth analyst Brett Eversole wrote about the same topic. However, Brett looks at the markets from a completely different perspective. My work is "bottom up." I'm looking at the detailed fundamentals of each issuer and each type of debt that's outstanding. Our corporate-credit database includes information on more than 40,000 individual credits.
 
Brett, on the other hand, looks at the dynamics of the entire market, not individual issuers. What he sees is that credit spreads (the premium investors earn to hold risky debt) are far too low for this stage of the credit cycle. His advice is to sell all of your high-yield bonds, right now. If you haven't seen his work, I'd recommend looking at it closely.
 
I've been writing about these risks to subscribers of my Stansberry's Credit Opportunities newsletter for months. Looking at the corporate-credit market at the individual-issuer level, we've watched all of the good opportunities disappear.
 
The following chart shows you the percentage of distressed, high-yield bonds that are trading at significant discounts. The dark blue bars indicate what percentage of the market is trading at a deeply discounted price (below 50% of par) and the light blue shows you the percentage trading at a substantial discount (50%-80% of par – that is, a 20%-50% discount).
 
In the first few months after we launched Stansberry's Credit Opportunities, around 11% of the market was trading at a substantial discount or more. Today, it's just 1%.
 
So, is today a great time to buy distressed corporate debt? No, absolutely not. Does that mean the strategy doesn't ever work? No, absolutely not.
 
Our job as investment analysts is to stand at the plate and look at the pitches. We can't control what the pitcher throws. We can only decide when we're going to swing. But the cool part of this game is that there are no "called" strikes. There's no penalty for not swinging.
 
That ability, to sit tight, hold cash, and ignore everything except for the "fat pitch" right over the plate is something that most investors never learn. But I hope you will.
 
You can bet that at some point in the next four years, the risk spread on junk bonds will "blow out" again to 10% or more. When that happens, we'll start pounding the table on buying carefully selected distressed corporate credit. These bonds will be trading for $0.80 on the dollar (or less) and yielding 15% a year or more. These are great investments that can provide unbelievable returns, with almost no risk.
 
We made a slew of these recommendations during the 2009-2010 default cycle. We did it in 2015 and 2016, when defaults first spiked off their cyclical lows too. I'm 100% certain we'll be there for our subscribers when it's time to put capital to work in this asset class.
 
Until then, we've just got to keep watching the pitches.
 
Good investing,
 
Porter Stansberry
 
Editor's note: Buying corporate debt may be an incredible "fat pitch" idea… when the time is right. But Steve has one investing idea you can start profiting from right now. This opportunity could lead to 500%-1,000% gains over the next few years, no matter what happens in the U.S. economy. Get on board before you miss your chance… Click here to learn more.

Source: DailyWealth

A Bubble in This Sector Could Trigger the Next Financial Crisis

Steve's note: Longtime readers know I am bullish on U.S. stocks – and I expect the biggest gains are still ahead. But my friend and colleague, Porter Stansberry, is seeing warning signs in the market. Today, we're sharing his take on how "free money" economic policies have led to unsustainable business models – and how one sector could bring it all crashing down…
 
Today… something I don't think you've seen anywhere else before – the "butcher's bill" of our current economic policies.
 
We all know that printing money isn't a good economic policy.
 
If printing money worked for an economy, then Zimbabwe would be Switzerland and Argentina would be wealthier than the United States. Incredibly, the world's "smartest" and most powerful economic mandarins have all adopted debt monetization (aka quantitative easing) as their core economic lever.
 
Anyone with a shred of common sense… or any understanding of human nature (or history)… knows this won't work for long. After all, not paying debts is a lot easier and more fun than facing a sober and sound economic reality.
 
Alas, there is no Santa Claus.
 
And, sooner or later, global confidence in this gigantic paper-money swindle will disappear, like blowing out a candle.
 
The question is, what will trigger that "tipping point"?
 
I've got a few ideas…
 
I haven't seen any serious writing about the long-term damage caused by the world's largest economic areas adopting "free money" (zero-percent interest rate) policies. Capitalism without interest rates isn't a free market. It's a Bizarro World where everything about how a normal economy works gets turned upside down.
 
Let's look at the harm these policies have caused to actual large companies and see where this Alice-in-Wonderland kind of economy will take us.
 
Because we've ended up with something outrageous – for-profit companies that simply aren't interested in profits…
 
The first thing I've noticed about the world since 2010 is that we now have virtually unlimited amounts of capital available for any company who wants to borrow it.
 
That has led to a huge expansion in the amount of junk bonds outstanding – including companies like oil-exploration firms that haven't normally had access to large amounts of long-term credit. (We'll talk more about that in a minute…) But the impact has been even more significant for "investment grade" credit. Here, virtually unlimited amounts of credit have become available for almost nothing.
 
In theory, the costs of doing business are limited to capital and labor. Technology has greatly reduced the labor inputs for most businesses. With nearly free capital and greatly reduced labor inputs… the costs of producing a widget or providing a service have plummeted across our economy.
 
That sounds great, right? Lower costs should equal bigger profits. But of course, there's also competition. When everyone has access to unlimited capital… and technology limits the per-unit cost of labor… economic theory suggests there will be a race to zero. No one will be able to make a profit because there's no scarcity of capital, and therefore no ability to increase relative productivity.
 
And… what has happened?
 
The last several years have seen the rise of companies that are experts at exploiting technology to reduce labor costs. Free capital and zero per-unit marginal labor costs equals a whole new form of capitalism that's genuinely unlike anything the world has ever seen before.
 
These are companies with massive scale, massive sales growth… and virtually zero profits.
 
Amazon (AMZN) is the most famous example. In just the last three years, the Internet retailer's revenues have almost doubled (from $80 billion to $140 billion). Meanwhile, its profit margins haven't budged. They remain less than 2%. With this kind of scale and almost no profit, Amazon has been able to grow faster and faster, into all kinds of new businesses. The company doesn't have to worry about cash flows to power investments into new lines of business because, after all, capital is free.
 
So even though Amazon has only earned profits of $3 billion over the last three years, it has been able to invest $17 billion into growing its core business and building new businesses.
 
I've never seen a company of this size borrowing such a high multiple of its annual net income to spend on capital investments. And I'm pretty sure nobody else ever has either. Just think for a minute about this…
 
On revenues of $320 billion… Amazon has only earned $3 billion in net income. Meanwhile, it has spent $17 billion on investments in just the last three years. It borrowed $7.5 billion in the last two years to help finance these investments.
 
The result of these kinds of ongoing massive investments is a company with a market cap of close to $500 billion… that has a lifetime, total combined, retained earnings of less than $5 billion. And since it has never paid a dividend, those are the company's total lifetime earnings.
 
It's a for-profit company that doesn't intend to make a profit. And it doesn't have to, because there's unlimited amounts of additional investment capital, available essentially for free.
 
Sounds great… for consumers. But is it good for investors? Is it good for our economy?
 
It hasn't been good for IBM (IBM). In the face of competition from Amazon's Web Services business (its cloud offerings), IBM's revenues declined for 20 straight quarters. IBM can't shed per-unit labor costs because it's stuck with tens of thousands of legacy engineers.
 
It hasn't been good for the U.S. retail industry. Amazon can afford to build unlimited amounts of new warehouses and distribution space. Again, capital is free. But retailers can't possibly compete on per-unit labor costs. They've got to staff each store.
 
And it's not going to be good for U.S. media companies. By tying entertainment content to its "Amazon Prime" memberships, Amazon is pointing a gun directly at the head of every media/entertainment company in the U.S. Good luck competing with a $500 billion firm that doesn't have to bother with profits and has the world's best online technology.
 
But… is that good for our economy? What happens when investors realize, much to their chagrin, that Amazon isn't ever going to make any money? What will happen when investors realize that Amazon's core competitive advantage is that it will never make a profit?
 
What's the point of capitalism again?
 
I could show you dozens of companies whose entire business models are predicated on virtually free access to unlimited capital. Their only competitive advantage is a central bank that has lost its mind. My bet is that these firms won't last for long because the current policy is unsustainable.
 
Why is it unsustainable? What will cause it to collapse?
 
My bet is commodity prices.
 
Take a look at the PowerShares DB Agriculture Fund (DBA)…
 
This exchange-traded fund ("ETF") owns commodity futures. Those are contracts to deliver real-world commodities, like hogs, soybeans, cattle, and cocoa. This ETF peaked in early 2008 at a little more than $40 a share… and has been in decline ever since. Farmers are great at driving down per-unit labor costs. Give them access to free capital, and supplies are going to boom – along with tractor sales.
 
Now, look at a chart of Deere & Co. (DE) – tractor maker to the world. You'll notice its share price has more than quadrupled since the financial crisis, from $27 a share to $111 a share. Farmers have bought a lot of tractors in this cycle. And commodity prices are crashing as a result.
 
And here's the problem…
 
Deere has been very effective at passing on the central banks' free money to its customers. The company now holds $24 billion in loans and leases (up from $17 billion in 2008). The company's market cap is only $34 billion. Do you think the management should be betting the company (founded in 1837) on the ability of farmers to repay $24 billion in tractor loans?
 
What could possibly go wrong?
 
Commodity prices and markets are where the central banks' policy of free money is going to crash on the rocks of reality. The real world can only consume so many soybeans… or burn so much oil. Real-world growth limits the uptake of this massive increase to capital. And it's in that transition that the financial risks lie.
 
I didn't even mention the oil markets.
 
The glut of oil is one of the primary signs of excess in our capital markets. By my estimation, close to 30% of all the "free money" lending the U.S. central bank financed between 2010 and 2014 ended up in the oil patch. The result has been an explosion in U.S. oil production.
 
To summarize the resulting overcapacity that developed, look no further than the days supply of crude oil in America.
 
Supply almost never exceeded 30 days – ever. Supplies hadn't crossed that threshold in almost 40 years. But since crossing over 30 days supply in early 2016, days supply has barely been below that level. And we set a new all-time high supply mark in March, when that reached 34.2 days.
 
Keep in mind, this huge buildup in crude inventory occurred after a landmark change in U.S. law to permit the export of crude oil.
 
Meanwhile, despite the obvious glut, the rotary-rig count continues to grow. Every day, we're drilling more and more. Why?
 
Because free money also means lots of speculation. Speculators have never bet more on higher future oil prices. Historically, betting on higher prices when OPEC cuts production has been a one-way trade – a guaranteed way to make money. My bet is that this won't prove to be true this time… a result that will shock oil traders and cost them billions.
 
But in the meantime, producers can finance more additional production today by selling production into the futures markets to these speculators.
 
The futures markets, when functioning normally, help smooth out prices between peak-demand seasons. But now, thanks to the central banks and the speculators they're financing, they're perpetuating an epic oil glut that will make the coming bust in oil prices even worse than in 2015… and potentially as bad as the 1930s.
 
Central banks' free-money policies have led to a massive bubble in commodity production and the credit structures that have financed these huge gains. This commodity bubble will blow up first… and lead to the next major financial crisis.
 
Good investing,
 
Porter Stansberry
 
Editor's note: Porter believes the situation in America is dire… But Steve sees a different opportunity in the markets today – outside of the U.S. economy. This investing idea could lead to 500%-1,000% gains over the next few years. Click here to learn more.

Source: DailyWealth

This Market Has Doubled Three Separate Times in the Last 12 Years

 
How many stock markets have the chance to double in just 12 months?
 
Not many…
 
It took U.S. stocks roughly four years to double after the 2009 bottom.
 
That was a huge move in the U.S. market… But it wasn't even close to a double in 12 months.
 
The list of overall markets that can double from here in a single year is short… And one country sits at the top of the list.
 
You might not know it, but this country's stocks have doubled in a single year three separate times – all within the last dozen years. And there's a great chance that it will happen again, soon.
 
Let me show you why…
 
If you haven't guessed yet, I'm talking about China.
 
Maybe more than any other global stock market, China has a history of spectacular short-term moves…
 
You see, China's stock market has delivered triple-digit percentage gains – three separate times – since 2006… And each of those booms happened in the course of a year.
 
Take a look at this chart of the Shanghai Composite Index…
 
That's an incredible history. And it shows the kinds of gains that are possible in Chinese stocks.
 
My boss Porter Stansberry said it best when we launched my True Wealth China Opportunities newsletter last fall…
 
The thing that's so exciting about [China] is you can get 10 or 15 years' worth of market appreciation in less than six months. I don't know if it's going to happen tomorrow or if it'll happen six months from now, but this will absolutely happen again.
Porter is exactly right… When China booms, it really booms.
 
This is one of the few markets in the world where prices can double in 12 months…
 
That's not likely to happen in the U.S. or Europe. But it can happen in China. It has happened three separate times over the last dozen years.
 
I fully expect to see another quick, triple-digit boom in China at some point in the next five years. And it could happen soon…
 
You see, there's a huge change on the way for China's market. A major announcement is expected next month. And it could be the catalyst for the next double in China's stock market.
 
I'm sharing all of the details of this change tonight in a free emergency briefing.
 
This is the first time I've hosted an emergency briefing… But this big change coming to China is too important not to share.
 
You can find all of the details of how to attend, for free, right here. I'll explain what's about to happen… And I'll even share one of my favorite ways to invest in China today.
 
I hope you'll join us. And I hope you'll be on board for China's next triple-digit move higher.
 
Good investing,
 
Steve
 
Editor's note: China's stock market has a history of triple-digit booms… And next month's announcement has the potential to kick off another major rally in Chinese stocks. To find out more – and to get one of Steve's top recommendations to start profiting from this opportunity – make sure you attend the emergency briefing TONIGHT at 8 p.m. Eastern time. Reserve your spot right here.

Source: DailyWealth

This Great Anomaly Will Go Away Soon – Take Advantage Now

 
I've called this "the greatest anomaly in finance."
 
It's a massive discrepancy – one that makes no sense.
 
Importantly, you can make a lot of money as the discrepancy goes away… And it will go away.
 
So what is this anomaly? Let me explain…
 
Many stocks trade in different places – whether on different stock exchanges or in different countries.
 
For example, Microsoft (MSFT) trades in Germany, just like it trades in the U.S.
 
This is not normally a big deal…
 
The price of Microsoft shares trading in Germany is typically the same as the shares trading in the U.S. If a penny-or-two difference appears, computerized traders jump in to capitalize on that spread.
 
It's a basic version of "arbitrage" – buying the cheaper stock and selling the more expensive one.
 
You and I would never do this, because there's only a penny or two of profit when the opportunity appears. And thanks to computerized trading, the opportunity is typically gone as soon as it appears.
 
However, the story much different with one country's stocks: China.
 
Right now, there's a massive difference in the prices of the same companies trading in China and in Hong Kong. Today, as I write, the identical shares are (on average) 19% more expensive in China than they are in Hong Kong.
 
Said another way, the shares in Hong Kong need to rise by 19% to equal the price of their China-traded identical twins.
 
This is a crazy anomaly – the biggest anomaly in finance.
 
Here's what the average price difference of A-shares over H-shares (called the "AH Premium") looks like over time…
 
As you can see, the premium is shrinking…
 
I started writing about this anomaly in 2015. Nobody talked about it that year… or even in 2016.
 
This year, finally, the Chinese have been piling in to take advantage of it… However, a considerable gap still exists. The current premium sits at 19%.
 
Ultimately, the Chinese premium should end up at zero. The gap should completely go away.
 
Just like Microsoft trading in the U.S. and in Germany, smart traders will arbitrage away this premium by forcing up the prices of the cheap listings – and forcing down the prices of the expensive listings.
 
The simplest way for you to take advantage of this is to buy the iShares China Large-Cap Fund (FXI).
 
It's the biggest China exchange-traded fund… and the easiest way to enter this trade.
 
Three of FXI's top five holdings are dual-listed in Hong Kong and China. These are massive businesses, including the largest bank in the world. And while the premiums have narrowed considerably, they still exist.
 
I am incredibly bullish on Chinese shares right now. And taking advantage of the AH Premium is just one of the many smart ways to get exposure to China today.
 
I highly recommend you own China – now. FXI is the simplest way for you to do it…
 
Good investing,
 
Steve
 
Editor's note: A huge change is coming to China's stock market in a matter of days… which means this rare setup may not last much longer. That's why Steve is hosting an Emergency Briefing tomorrow at 8 p.m. Eastern time. He'll even share a recommendation live on air, so you can take advantage immediately. Reserve your seat for free by clicking here.

Source: DailyWealth

Japan's 527% Boom… And Why China Could Be Next

 
Japan in the 1980s was one of the greatest booms in stock market history…
 
Japanese stocks soared 20% a year… for an entire decade… for total returns of 527%.
 
Today, I believe China is on a similar path to Japan in the 1980s.
 
So I strongly urge you to get some exposure to Chinese stocks – right now.
 
The parallels are strong. Let me show you…
 
During the 1970s and 1980s, Japan's export economy was firing on all cylinders…
 
Its economy grew an average 5%-plus during this time as the country moved from an emerging to a developed market.
 
The stock market reflected that growth…
 
Japan's benchmark TOPIX Index had a solid decade of performance in the 1970s as a result. It increased roughly 10% a year for a total gain of 159%.
 
Then the fireworks really started…
 
Japanese stocks doubled that return in the 1980s – increasing 20% a year – for a total return of 527%. Take a look:
 
Japan had tons of money coming in from selling its goods overseas… And it wasn't importing nearly as much as it sold. So it had big trade surpluses, like China does today.
 
Also like present-day China, Japan continued to open its currency system to the world in the 1980s…
 
In the '70s, the Japanese yen moved from a closed system (where you couldn't freely buy or sell it) to an open system. By the early '80s, the change was complete. Money could freely flow in and out of the country…
 
The country entered the 1980s with a goal of opening up its economy to the world… And it achieved that goal as the decade went on – with spectacular results for investors.
 
Today, China is on a similar path…
 
China is an export-driven economy with multitrillion-dollar currency reserves. In the last few years, it has moved from a tightly-controlled currency system to something more like a "floating" system based on several global currencies. China has a long way to go before its currency is "fully convertible" – meaning it's freely traded. But it has already taken the first steps.
 
And like Japan in the '80s, China's stock market continues to open up to foreigners…
 
The Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect both allow money to move more freely from Hong Kong H-shares (which the rest of the world can trade) into China local A-shares.
 
That means A-share investments that were nearly inaccessible to foreigners a few years ago are opening up. And I expect this to continue in the coming years.
 
The end result of Japan's globalization was a 527% gain over a decade. And I believe we have a similar opportunity in China today.
 
We want to be on board for that potential boom. If things go as they did in Japan, the upside in Chinese stocks is enormous.
 
Get at least some of your money invested in China today… The opportunity is too good to miss out on.
 
Good investing,
 
Steve
 
P.S. I believe today's opportunity in China will end up being one of the biggest of my career. That's why I'm hosting an Emergency Briefing this Wednesday to go through several of the details. I'll even give away one of my top China recommendations. You can watch the entire presentation for free. Click here to learn the full details.

Source: DailyWealth