| Saturday, September 19, 2015 | | | The Lazy Man's Way to Riches
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 Amidst the various awards, artwork and investing books that decorate my home office, there's an old, faded tote bag that hangs across from the desk. It's most visible from where I sit.
And it serves as a reminder. The tote bag is from Lucent Technologies. It's a subtle, constant visual aide-mémoire that all bubbles will burst.
In 1996, Lucent was the largest IPO ever... though its $3 billion IPO is dwarfed by today's standards.
It was once the most widely held stock. But in a handful of years, the company went from 165,000 employees to 30,000... Its share price went from $7.50 to $84 to $2... Its market cap tumbled from $258 billion to $15 billion.
And then it was gone.
Like so many bubbles, Lucent's promise was built on inflated fantasies and its demise was triggered by the very real burden of fantastical amounts of debt.
When the light of bright, sunny days shines through the windows in my office and I find myself staring off into space thinking, looking at a wall decorated with accolades, the shadow of the Lucent tote lurks underneath.
The scariest thing is, there is a shadow lurking underneath the rosy global economic picture that's currently being portrayed. The jolt in August in markets around the world was a warning... The question is, were you paying attention?
"It Will Be Very Nasty"
Some of the biggest names in investing are warning that "it's getting late in the bull game."
For example, a famous billionaire commodity investor recently stated that when the Fed's "ocean of liquidity" gets cut off, "it will be very nasty" for investors.
Another billionaire hedge fund manager, one of the 40 highest earners according to Forbes, claims "the market is extremely overheated," adding that "the public is walking into a trap again as they did in 2007."
Obviously, there may be dangerous waters ahead. Here's what you should do to prepare.
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The Crumbling BRICs
Jim O'Neill coined the term "BRICs" more than a decade ago. His belief was that the BRICs - Brazil, Russia, India and China - would evolve into the four largest economies in the world by 2050.
For many years, it seemed like O'Neill's call was spot-on. Even O'Neill himself admitted in his 2011 book, The Growth Map, that the BRICs shockingly exceeded his own expectations.
From February 2009 to April 2011, the iShares MSCI Emerging Markets ETF (NYSE: EEM) gained 135.5%. That was more than twice the gain the S&P 500 saw during that span.
Since 2011, the combined BRICs' GDP has grown to $16.6 trillion. That's a 22.1% increase...
But if you take away China - now the second-largest economy in the world - you see some cracks start to form.
Brazil's economy has shrunk. Its GDP has been struggling for a few years now. And last week, its sovereign debt was rated as junk.
The Brazilian real has collapsed 30% against the dollar; it has the worst emerging market currency performance in the world.
In addition, Russia's economy is in decline.
The Russian ruble has dropped nearly 50% against the dollar just this year. It's the worst-performing currency in the world against the greenback. The country is also in recession, with GDP falling as European sanctions, as well as the imploding crude market, eviscerate its finances.
Currently, China and India are keeping the BRICs afloat.
Each of their economies is growing at 7% per year... but the next big fault waiting to fracture is China. China's debt is growing twice as fast as the debts of the U.S. and U.K. in the years leading up to the 2008 financial crisis.
And that should give us pause...
If China starts to unravel, there could be serious trouble on the horizon.
The Tumble Dragging on the World
Over the last two years, emerging markets have greatly underperformed U.S. stocks. And you can see from this chart that the Emerging Markets ETF almost followed directly the performance of the Energy Select Sector SPDR ETF (NYSE: XLE)...
This year, the S&P 500 is down almost 4% year-to-date, while the Energy Select Sector ETF is down almost 20% and the Emerging Markets ETF is down 14%.
Lower prices for oil, lumber, steel, iron ore and copper is the reality we're facing.
Precious metals gold, silver, platinum and palladium are all near 52-week lows.
These lower prices are problematic for the BRICs, especially Russia and Brazil...
Brazil and Russia are two of the top 10 oil-producing countries in the world. With the collapse in crude, their economies have been pushed further into recession.
Russia is also home to Norilsk Nickel, which accounts for 17% of the world's nickel, as well as 41% of the world's palladium, and is a top-10 producer of copper.
Brazil's Vale (NYSE: VALE) is the second-largest mining company in the world, the second-largest producer of nickel and the world's largest producer of iron ore. And since palladium is extracted during nickel mining, the country is also one of the world's largest producers of palladium, as well as various other precious metals.
China is the largest trading partner for both of these countries... But as China's economy has slowed, its demand for resources has directly impacted Brazil and China.
India is in the safest position at the moment. Though its agriculture industry is worth watching, particularly since 53% of all workers in the country are employed by the farming industry. When this sector struggles, its impact is broadly felt.
The BRICs have already slowed down their consumption of precious metals. As a result, gold, silver, platinum and palladium are all near 52-week lows. And diamonds are down 29% year-to-date.
As investors, we have to remind ourselves of the lesson we learned from Lucent Technologies... Companies - and countries - that take on heavy amounts of debt are at risk of crumbling.
The upside is, once we've finally found a bottom, this will be the buying opportunity of a decade. And the surge higher is almost straight up.
Good investing,
Matthew
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