Who wouldn’t like to have a license to print money? We know the government has it and uses it freely, but for most of us mortals making money is more challenging than simply turning on a switch.

And it's not just making money, it’s keeping it and making it grow, that adds yet another facet of uncertainty and headache. Add to it the natural emotion of wanting more (aka greed) and we’re stuck with a consistently changing recipe that may or may not prove successful.

As the last ten months have shown us, it’s not impossible to “create money out of thin air.” Banks and financial institutions seem to have the copyright, at least for now.

In a funk, but happy

The economy is in a funk, people are losing jobs, money is getting tighter, yet stocks have gone up tremendously – in a too good to be true fashion.

U.S. stock indexes a la Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) have certainly carried their weight but the real action has been abroad. Can you say BRIC and emerging countries?

Since their March 2009 lows, all of the following ETFs (and more) have more than doubled: SPDR S&P BRIC 40 (NYSEArca: BIK), iShares MSCI BRIC (NYSEArca: BKF), iShares MSCI Emerging Markets (NYSEArca: EEM), and Vanguard Emerging Markets (NYSEArca: VWO). From bottom to top, some have clocked in gains over 150%.

Even though many found it tough to see the forest through the trees, the ETF Profit Strategy Newsletter predicted a sharp surge in global markets, emerging markets in particular. Previously on March 16, 2009, the newsletter predicted what many thought impossible:

“Similar to the U.S., many markets around the globe are in a bottoming process. Rather than picking individual countries to benefit from the upcoming rally, it might be prudent to go with broad international ETFs such as the Vanguard FTSE All-World ex-Us ETF (NYSEArca: VEU) or iShares MSCI EAFE (NYSEARca: EFA). While emerging markets should move in the same direction as developed markets, they offer more upside potential.”

We got the rally, now what?

It is fascinating to observe the inner workings of the human psyche. Just a little more than a year ago, nobody wanted to own stocks, domestic or international. Today, after stocks have soared for nearly a year, even doubled, investors are eager to buy exactly what they didn’t want to own at half the price last year.

Particularly for emerging markets, valuations have become a major concern.

To many it’s not quite obvious yet, but most emerging country indexes have been struggling. A few days of heavy selling have erased much of the gains since September. The S&P BRIC 40 Index has not made a new high since November 18, 2009.

China, the “C” of BRIC has been more or less in a down-trend since the Shanghai Composite’s (SSE Composite) peak back in August. U.S. investors can’t invest in the SSE Composite, but it’s U.S. ETF counterpart, the iShares FTSE/Xinhua China 25 ETF (NYSEArca: FXI) has been languishing as well.

In Shanghai, prices for high-end real estate were up 54% through September, to $500 per square foot. Housing starts in China rose some 200% year-over year. This was largely fueled by a 200% year-over year increase in new bank loans. It seems like things have gotten out of control though.

According to the Financial Times, at least 34 companies, mostly in the industrial and real estate sectors, have canceled or reduced plans to raise money. The Bank of China, the most aggressive lender among the large state-owned banks, is no longer approving loans.

Fitch Ratings, for the first time in over six years, downgraded two mid-sized Chinese banks.  This was a rare move highlighting mounting concerns that China’s lending spree has become fertile ground for brand-new green shoots of toxic assets.

A double-edged sword

Emerging markets gained bargaining power back in 2008, as oil, metals and agricultural commodities jumped into bubble territory. Remember oil at $147/barrel or $5/gallon gas?

To a never before seen extent, natural resource-rich countries like Brazil (NYSEArca: EWZ), Russia (NYSEArca: RSX) and India (NYSEArca: INP) were able to make unprecedented demands. With developed countries dependent on oil and basic food stuffs, emerging markets gained control while their respective country indexes gained momentum.

Today the situation is different. The world is not running out of oil anymore. At around $75/ barrel, oil prices are lower than oil-producing nations would like to see them. Demand for industrial metals and agricultural commodities have normalized as well.

The golden grail

Any country with a billion or more inhabitants is viewed as a growth market today. Multi-national companies will do what it takes to promote and sell their products in China and India. If U.S. consumers aren’t buying, emerging market consumers should be, right?

According to some numbers, China’s economy grew by 8.7% in 2009. This compares quite favorably to the 0.8% contraction the rest of the world experienced. The China National Statistics Bureau calculates that about 20% of the world economic growth is attributable to China and the United Nations estimates that China has accounted for half of the world economic growth this decade.

The run for China is on

While everyone is pouring into China, many forget that you can’t squeeze a dry sponge. In late 2007, early 2008, just as the U.S. markets started to fall apart, the idea of “decoupling” was indoctrinated by the financial media on a daily basis – emerging markets will do well, while developed markets will struggle.

Decoupling did not play out that way. Throughout 2008 emerging markets fell harder than developed markets. Any bet on decoupling was a losing proposition. Throughout 2008, the ETF Profit Strategy Newsletter recommended to stay away from stocks in general, emerging markets in particular – for a good reason.

Even though countries like India and China represent a jack-pot of potential buyers for all sorts of goods and services, the evidence says that emerging markets are not buying U.S. made products and U.S. consumers aren’t looking to buy “made in China.”

The Baltic Dry Index (BDI), an index that measures the global demand for shipping activity – the life-blood of global trade – has been bouncing from one low to the next. Throughout 2006, 2007, 2008 and 2009 the BDI has provided the direction for economic strength and follow through. Recently, the disconnect between economic activity and stock market gains has become glaring (see chart below).

This time is different

Reality and perception may remain at odds with each other for an extended period of time, as seen over the past year or so. But we also know that reality always catches up with fiction.

We’ve seen bubbles burst in 2000 (technology), 2005 (real estate), 2007 (financials) and 2008 (oil and commodities). Of course, every time investors get used to the comfort of rising prices, the reason for rising prices are being rationalized – This time is different!

Perhaps this time is different. With the U.S. consumer in such deep trouble, corporations have no other choice but market across the ponds and hope for strong demand from populous nations. This, however, is a strategy born out of desperation, not brilliant planning. Desperation seldom works.

Looking at the U.S. stock market, the ETF Profit Strategy Newsletter proclaimed on January 15, 2010 that every passing day presents a better opportunity for bearish investors and recommended short ETFs. While U.S. markets are the easiest to predict, there are plenty of landmines and opportunities buried across international (developed and emerging) markets.

The February issue of the ETF Profit Strategy Newsletter includes a detailed short, mid and long-term outlook for all major asset classes along with target prices and corresponding ETF Profit Strategies. This is not per say a license to print money, but a safety net that has protected many against making the wrong move at the wrong time.