Three Places to Profit in Spite of the Fed's Missteps

By Keith Fitz-Gerald
Contributing Editor

I wish that I had something deeply insightful - or at least clever and pithy - to say about the U.S. Federal Reserve's decision to drop interest rates by another quarter point yesterday (Wednesday).

But I don't.

Yesterday's decision to cut short-term rates is just more of the same from Team Bernanke. In fact, I'd expect no less given that it's an election year and that these guys did what any self-serving politicians would do under the circumstances…pass the buck.

Sure lowering rates gave the U.S. markets a shot in the arm, with the Standard & Poor's 500 Index up 1.20% on the day. But when compared to selective international holdings -  like the benchmark iShares FTSE/Xinhua China 25 (FXI) exchange-traded fund (ETF), which rose 3.26% - U.S.-centric investors were once again essentially left in the dust, this time to the tune of 2.06% in a single day.

That may not sound like much, but leaving 2.06% on the table represents an annualized opportunity loss of 412% (assuming 200 trading days a year) - and that's a big number, no matter how you slice it.

Now if leaving that kind of money on the table doesn't get your attention, my team of global investing experts and I can't help you.

But if you find that a revelation of that kind does furrow your brow, here are a few more things that you absolutely must understand about what happened today:

  • First, lower interest rates translate into a less-valuable dollar. That means U.S. consumers can expect some personal pain in the months ahead, as imported goods inevitably increase in price. It also suggests that realignment in the global economic pecking order is all the more imminent, given the gutted greenback. [The dollar declined by 0.32% today, following the Fed announcement]. This realignment is something to watch for, given the rise of Eastern Europe, the newfound financial aggressiveness of the cash-rich Middle East, and, of course, China's emergence on the world stage.
  • Second, lower rates will indirectly fuel even higher oil prices. Many investors don't see this, but rising oil prices have more to do with a falling dollar than anything that's happening in the Middle East. The reason is that oil is priced in petro-dollars, meaning OPEC and other oil-producing countries will boost prices to keep their profit margins steady. In the face of escalating demand, this will reinforce another round of commodity-related land grabs in the months ahead, with the spoils going to those with the strongest currencies. Investors who are along for the ride will laugh all the way to the bank. [Oil rose by a stunning 4.34% yesterday, to close at $94.30 per barrel in the futures pit. Then, in after-hours trading, oil soared as high as $95.28 a barrel. For today's related Money Morning news story on this spike oil prices, please click here].
  • Third, lower interest rates absolutely underscore the need to have global investments in your portfolio because, with each drop in the dollar, those holdings become more valuable. When it comes to your investment portfolio, this will provide an extra "tailwind" - and will significantly boost your investment returns - as a reward for being properly diversified internationally. Investors who haven't taken this step will benefit from Team Bernanke's near-term shot in the arm, but in the long run will get left far behind because the growth overseas will far outstrip any available domestic returns.

You may find yourself asking: What happens if - or when - the greenback reverses course and gets stronger? If, for some strange reason, that does happen, then this strategy will change, too. But the way the economy is being managed right now, I'd say there's about as much a chance of that as there is of meeting Elvis in the parking lot of Minneapolis Wal-Mart tonight.

Wrapping up, you may be wondering if it's too late to get in on the international action.

The short answer is simple: Absolutely not.

We've talked about this extensively here at Money Morning, but just in case you missed our analysis, let me reiterate.

As an investor, you've either got to go global, or go home.

If you follow this strategy, you'll have the chance to profit in three ways:

  • First, as weak as the greenback has gotten, the great dollar debacle is still in its infancy. The U.S. economy will remain reasonably solid over the long term, but the spectacular growth will clearly take place beyond the U.S. borders. As yesterday's relative moves of the U.S. and China markets alone illustrate, this means that the real investment profits will be generated overseas. And that's measured both by absolute returns, and opportunity costs - profits foregone by betting on the wrong horse, in this case, the U.S. stock market.
  • Second, as we've also already seen, a weaker greenback increases the odds that we'll see another run-up in commodity prices. And that will send commodities stocks higher, even though they've enjoyed a record run already. Most commodity firms today are global players, no matter where they're based. The profit potential here is immense - on several different fronts.
  • Third, you can anticipate a corporate-takeover and property-buyout binge here in the U.S. market that will make what Japanese suitors did here in the U.S. market back in the late 1980s look more like a flea market or church bazaar. Back then, Universal studios, Columbia Records, Rockefeller Center and the Pebble Beach golf course (with its lonely cypress tree) all ended up with new owners. Lawmakers sounded the alarm, and so did the U.S. news and entertainment media. Fortune magazine carried a piece entitled, "Where Will Japan Strike Next?" And author Michael Crichton's alarmist book, "Rising Sun," was made into an equally alarmist - but no less fun to watch - feature film that starred Sean Connery and Wesley Snipes. This time around, cash-rich foreign buyers - Middle Eastern business concerns, emerging Chinese industrialists and even some government-owned "sovereign investment funds" will ride through our markets like the proverbial Four Horsemen of the Financial Apocalypse, snapping up prime U.S. assets at what for them will be bargain-basement prices - thanks to the neutered dollar.

Investors who stake an investment claim in all three areas will literally make out like bandits. Those who don't will probably still do okay - but nowhere near as well as those who climb aboard now.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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