Peter Cooper's  Instablog

Unscrupulous investment advisers do not worry about such trifles. Their only concern is to get a fat commission on your investment.

It is not as if the warning signs are not obvious. The boom in Chinese stocks has been breaking down since mid-August when astrologers had pointed to a coming crash, and there was indeed a major correction in China. Is that the start of a downtrend? Well, what has gone up usually comes down in stock markets.

But stepping back a little what is really worrying about the 62 per cent surge in emerging market stocks since the beginning of the year, a 94 per cent recovery from the lows of the crisis last year, is the extent of this upswing.

It is so strong and so quick that the only word to describe it is a bubble. In China a stimulus package equal to half of GDP was injected into the economy in the first half of 2009 and this liquidity has been the main cause of the stock market rise.

The fundamentals of a 20-25 per cent collapse in Chinese exports this year are clearly not the market driver. India has seen an even bigger collapse in trade. Russia is suffering from lower hydrocarbon prices. Winning the Olympics is likely a market top for Brazil.

Now liquidity driven stock market rallies are particularly prone to sudden and dramatic corrections without any warning. Basically somebody calls fire and everybody dashes for the exit. In the Middle East things look a little different.

For once the Gulf States are taking a more sober tack. Stock markets are way off their bubble peaks of 2006 and real estate prices have crashed over the past year.

But is this not actually a fairer reflection of the economic outlook and trade flows than the inflated financial markets of the BRIC countries? For the BRIC markets to keep going up they require the developed economies to recover back to their old boom levels, and this is just not likely to happen anytime soon.

Just look at the 263,000 extra jobless in the US for September, worse than forecast, or the 23 per cent fall in US car sales that month as the government’s ‘cash for clunkers’ program came to an end.

Clearly the fall in global trade is not going to be a passing phenomenon but a new economic reality for the emerging markets. In the Gulf States the financial and real estate markets are already beginning to reflect this vision of the future, but are probably still someway from bottoming out.

So would it not be foolish to invest in emerging markets at this point? The volatility of emerging market economies is notorious, and you should wait for the right moment which will only come when today’s investors have lost a great deal of money.

You just know this has to be a signal to buy the offending asset class. It is a neat contrarian moment backed up by some hugely obvious market information that is not a secret to anybody: stocks are massively overvalued in a historically far too long rally, and the traditional month for crashes is October, and we are almost there.

Now I can understand the anti-short ETF case. They can point to the poor tracking record of these ETFs at certain points, their very raison d’etre. And holding these instruments for too long is not recommended because leverage costs money.

However, if I look back at the past three months most of them seem to have done a very fair job of delivering a leveraged performance to their respective index movements.

So my guess would be that if the stock market takes a big lurch down in October then these instruments are going to be among the top performers, even if a few days out or not by exactly the right percentage. It is a no-brainer that shorting stocks is the best way to make a fortune in a crash.

That makes the timing of Cramer’s outburst remarkable, and probably more a matter of linking to the court action pending than the market outlook. It is a bit like arguing over small change with a 10-ton concrete block about to drop on your head.

Perhaps too a little contrarian thinking might consider the third party arranging these ETFs. With all that negative karma in the investment universe will they not grab with both hands a clear opportunity to prove that yes they do track market movements, and can do so fairly well and enough to deliver massive profits.

What a way to demonstrate that their product not only has legs but can run and that it is the investors that have misunderstood them? Case dismissed!

Of course I am not a financial advisor and do not know the financial circumstances of any reader. But would it not be at least a fair point to argue that long ETFs are the ones to sell now, not the short ETFs?

Shares have enjoyed a huge rally in most markets since the lows of March and have been riding for a fall for more than a month. Last week investors also ominously moved money heavily into bonds, depressing yields, and the gold and silver price surge may represent another shift to risk aversion.

Will the gold and silver price rises hold this time? Gold has challenged the $1,000 barrier several times over the past year only to fall back.

If global stock markets now do suddenly take a tumble, correction or crash then precious metals are going to be sold down heavily to meet margin calls, although that will depend on how the players have positioned themselves after the experience of last year.

If that happens it is a great buying opportunity for the precious metals, and even more so for their shares which are leveraged against the ups and the downs of the underlying metals. For the really brave this could be the last big chance to buy junior exploration stocks at bargain levels.

Real gold bugs will be saying that gold has past $1,000 and that the only way is up. True, it could be that gold surges higher to $1,200 or more over the next couple of weeks and then has a correction and still stays above $1,000.

It certainly will not be a straight line upwards unless gold has entered its parabolic phase and speculation in the yellow metal is not nearly universal enough just yet for that to happen. But it could be starting. The encouragement being given to 1.3 billion Chinese to invest in precious metals does look like the start of this ball rolling.

So if you are not in the precious metals market it is perhaps high time to buy some gold and silver, although for gold and silver equities there might be a better opportunity to come in the market correction that looks inevitable after the 50 per cent plus rallies. Indeed, the very strength of the gold price today is a portent of near term stock market weakness.