Financial Crisis May be Creating the Best Investment Opportunities of our Lifetime, Money Morning Expert Says

Money Morning Staff Reports 

In the face of the worst financial crisis since the Great Depression, Money Morning Investment Director Keith Fitz-Gerald continues to uncover solid profit opportunities - including China, oil and other key commodities, and possibly even U.S. stocks.

To those who have followed his career, that's not a huge surprise. After all, while 2008 was a year that Wall Street would very much like to forget, for Fitz-Gerald it ended up being a year to remember.

Fitz-Gerald, a longtime market professional who has been investment director of Money Morning since 2007, made a number of key investment calls last year and has watched as the market continues to prove his forecasts correct. For instance:

  • When crude oil was trading listlessly at less than $90 a barrel, Fitz-Gerald predicted in a Money Morning Outlook 2008 investment story that "black gold" would move well into the high triple digits - and months later saw oil prices soar to an all-time high of $147 a barrel,
  • When analysts and elected officials in Washington were attempting to soothe American taxpayer fears by saying the cost of fixing the financial crisis could be capped in the "billions," Fitz-Gerald dismissed the prognostications and warned that the cost would be well into the trillions. He also warned that the crisis would involve the global banking community in a contagion that would spread well beyond our own borders.
  • Predicted - within a few points - what's so far proved to be the interim market bottom in the Standard & Poor's 500 Index.
  • Warned investors that China's stock market was in for a correction, but told investors to swap out of China stocks and into stocks of global companies doing business in China as a means of minimizing risk - a market call that brought Fitz-Gerald a "speaker of the year" award from a prestigious group of high-net-worth private investors.
  • Predicted - when America's "Big Three" automakers appeared to be working through some issues with onerous union contracts and retirement benefits - that the heyday of the U.S. auto company was already over and that the car companies would soon be fighting for their actual survival.

"The sad thing is that millions of investors experienced a white-knuckle ride they didn't deserve," Fitz-Gerald said. "We enjoyed some very solid success last year. But, as is true of any professional investor, the question becomes: Where do we go next?"

Fitz-Gerald has some ideas. A longtime energy bull, and an avowed expert on China, Fitz-Gerald says he's now tracking some trends that could lead to the best profit opportunities of our lifetime. Money Morning recently caught up with Fitz-Gerald at his home in Oregon, where he was working between speaking engagements. Here is a partial transcript of that discussion.

Money Morning:  You're acquired a reputation over the years as a sharp market analyst, in large part because of a series of public market calls that you've made over the past couple of years - market calls that were ultimately proven correct. What's your secret? What advice can you give to investors?

Keith Fitz-Gerald: Most investors make the classic mistake of being more concerned with being proven right or wrong than they do with what actually happens with their money. That's why we see such a "herd" behavior in the markets today. I'm more concerned with "possibilities," and with structuring profitable investment opportunities around them. I really don't care if I'm right or wrong as long as the strategies I assemble are flexible enough to deal with both contingencies and profit at the same time.

MM: This sounds complicated. Can you give us an example?

KF: What I do is actually very simple. I use a highly specialized branch of mathematics based on fractal theory to identify the underlying nature of the financial markets. This allows me to find relationships in data that would otherwise appear random and that others can't see using traditional analytical techniques. And I simply recommend high probability investments based on that understanding.

MM: I know this is at the heart of the Geiger Index. Is this also the key to your newest service, Time Trader Pro?

KF: Yes. In fact, there's a little fractal theory in everything I recommend, and in every forecast I make. But when it comes to the Time Trader Pro, there's a twist. The Geiger Index is set up to scan for probabilities associated with directional moves. The Time Trader Pro, which uses similar calculations, is set up to determine the relative lack of movement.

The advantage is that while the Geiger sets up the big gains that will carry investors forward into the eventual recovery I see building even today, the Time Trader Pro allows investors to potentially capture gains and high-probability profits in the directionless markets we're experiencing now. The two are designed to complement one another and, indeed, to also help establish the core positions we highlight in The Money Map Report.

MM: Do the numbers tell you everything?

KF: Not in my opinion. To be a really effective forecaster, I think you really have to combine firsthand knowledge with accurate analytics. To me, that means having "boots on the ground" and seeing stuff with your own eyes. The way I see it, there's simply no substitute for that personal observation. That's why I travel extensively every year.

For example, years ago, when oil was trading at $20 a barrel, I was tromping all over Asia and Europe, and was seeing the beginnings of a terrific ramp up in demand. At the same time, I was doing work that suggested severe supply constrictions. That led me to forecast oil at $100 within a decade. It got there far faster than that, of course, but the fact that I had planned for such contingencies paid off more than the actual price level, itself.

Incidentally, I have to tell you, I was laughed out of more boardrooms than I can count at the time. But that goes with the territory: You have to have the courage of your convictions to make such forecasts.

MM: Well, oil did go to $100 a barrel. Then it dropped back into the $80 range. And that's when you said that oil prices were going to head much higher.

I like to remind people that this was a "real" call - it's on the record in an oil story that was part of our yearly "Outlook" series. The story ran in late December, when oil was starting to move again. But you'd actually made the prediction a month or so before, while Money Morning writer Jason Simpkins was still researching the article. You said oil could "spike" to prices as high as $187 a barrel, and would then settle back down.

Oil didn't quite hit the $187 level you forecasted, but it did run up to an all-time high of $147, before settling back to where it is now. Did this surprise you?

KF: Given that we didn't get a major geopolitical shocker, I'm not surprised that we didn't hit $187. But I've been very candid in stating that the dramatic fall we've seen has been much deeper than I'd expected.

MM: Could oil prices stay this low for much longer?

KF: Anything is possible. The real question is: What's probable.

People are chalking the fall in prices up to lower global demand, but I think that's a mistake. What's really going on here is that, at lower prices, hedgers and speculators haven't had the need to hedge their contracts as extensively and this, more than any single factor, has helped pull down futures prices - which are tied to delivery - and keep them there.

The other factor that's affected oil has been the relatively rapid rise in the U.S. dollar. Oil is priced in dollars, so it's important to remember that a substantial portion of the fall in oil prices can simply be accounted for by that increase in the dollar.

MM: What about the long term?

KF: Longer-term, the world won't realize that global demand is rising all along - despite what the statistics say - until the economic recovery stimulates oil demand again. Probably no more than five years from now. Eventually, the fundamentals of declining production, growing demand, and thin inventories will overwhelm today's low prices. Which is why I think oil will be back at $212 dollars a barrel … a figure that's downright conservative compared to Matthew Simmons [peak oil pundit and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy"], who's on record predicting that oil prices will reach $500 a barrel.

MM: I know that your expectations for China have a lot to do with this. And India.

KF: Yes, they do. From a macroeconomic standpoint, both nations are growing by leaps and bounds - even with the problems posed by the global financial crisis. Sure there's a short-term contraction, but let's get that off the table right now. Longer-term, the trend is clearly for higher oil prices.

Both China and India have huge populations that are using increasing amounts of petroleum and petroleum-based products. And both have millions of drivers and middle-class consumers who have never known lower prices - so they don't think twice about paying more.

From a technical standpoint, oil is dramatically oversold to the point where much of the industry is unsustainable. History suggests that these stunningly low prices will result in diminished capital investment, declining exploration efforts and a reduction in rig counts. When the stimulus programs of the United States - and other key countries - ultimately take hold, these factors will combine to reflect net shortages and, logically, will force prices higher.

MM: We've seen this cycle before …

KF: Absolutely.

MM: Speaking of China, Keith, what's next for the Red Dragon? What do you see there this year? How about over the next five years?

KF: At this stage of the game, China is literally the only player on the field with enough muscle to pull the rest of the world out of hock. This means the rest of the world will have to play ball - whether they like it or not. Ironically enough, that's exactly what the G7 concluded recently when its members noted that China can use its huge trade surplus to spend it's way out of this mess at a time when the rest of the world is busy borrowing it's way out. There's a big difference between the two scenarios. I'd rather invest in growth, rather than borrow to grow, any day of the week.

MM: What else do you see, here?

KF: The view from 30,000 feet is this: I don't think there's an asset class on the planet that won't be at least indirectly affected by their China's actions within the next decade. In that sense, every investor needs some sort of China strategy, especially now.

MM: What about the stimulus?

KF: [U.S. Federal Reserve Chairman Ben] Bernanke and his minions have decided upon a course of action and are taking it. And while I'm as hopeful as the next person that it's ultimately successful, history paints a different picture.

No nation in recorded history has ever bailed itself out of a hole by debasing its currency, and debasing their currencies is precisely what the United States (and many other nations) are doing right now - at least for anything other than short periods of time.

The bottom line is this: The U.S. Federal Reserve, the U.S. Treasury Department, and the elected officials in Washington all believed they could spend the crisis into submission. But, ironically, all they've done is prolong it and I think that history will show that the cost of preventing the crisis actually exceeded the potential costs of simply letting it unfold and play itself out. What's more, history supports my contention.

I also think that history will show that there are all sorts of unanticipated consequences from all the spending and the debt that's now choking our country.

What really stinks to me is that a relatively small number of people drove the rest of us to the brink of financial oblivion, and that huge numbers of people who have tried to be responsible with their assets, who paid their mortgages on time, who own up to their debts, are now being involuntarily saddled with the bailout.

MM: What you're saying, Keith, is that lots of innocent American taxpayers and conscientious individual investors have paid with their homes and even their jobs for the misdeeds of others.

KF: That's right.

You know, during the early days of the financial crisis, there was a lot of conjecture on the Internet that the federal government should simply hand out a few trillion dollars to U.S. consumers. Most experts dismissed that as fringe thinking. It didn't seem so fringe to me then, and it certainly doesn't seem so now. The vast majority of the American people would have been far better off being able to put cash directly in their pockets to stimulate the economy than they will be now with government programs that reward bad business decisions and that throw good money after bad.

We may not have liked how it would have felt had the government held back and allowed some of these institutions to just fail. History has shown us time and again that the financial markets have a remarkable ability to deal very swiftly with such adverse financial situations - and with a surprising cost effectiveness. Why would this situation be any different?

MM: What will the fallout be here? For the economy? For the U.S. dollar? For gold?

KF:  Let's start with the dollar because that drives everything else. In the extreme short term, the dollar has proven to be a safe haven, which is largely responsible for its rise. At some point, however, this is going to have to change. You cannot put the printing presses in overdrive and expect things to remain the same. But that's exactly what Team Fed has done to date.

MM: What about inflation?

KF: Well that's the big unknown. Right now, the markets are pricing in deflationary expectations - based on the global downturn. In the long run, however, history demonstrates that the markets eventually must deal with this. What's more, the embers that are only smoldering now could easily ignite and turn into one of the hottest inflationary conflagrations we've ever seen.

What people don't understand is that consistent currency manipulation is merely staving off inflation; it isn't removing the threat of it. Most people also don't understand that this is being done at the expense of people's savings. They'll soon see this is the case. Knowing this, I don't see how any rational investor can afford to avoid preparing for inflation.

MM: So how does this play out with gold? With other commodities?

KF:  Contrary to what people believe, gold has never been statistically proven to be an inflationary hedge. But it is a great crisis investment that does have a direct correlation to interest rates and bond prices. So gold should really be tied, proportionately, to fixed-income investments because it helps stabilize them - and to provide an inflation hedge at the same time.

As for other commodities, the markets tend to run in 17-21 year cycles, and if we look to 2000 the beginnings of the latest one, that suggests we have until 2017, or so, before commodities lose their luster. In general, I'm a commodity bull, but clearly we have to time our selections carefully, because now's not the time for indiscriminant buying.

MM: One final U.S.-related question. What's the outlook for U.S. stocks right now? I know your models recently showed that the U.S. indices were nearing the "sweet spot," where valuations made them compelling enough to buy. Has that changed?

KF: No. We're still closing in on what could be the buying opportunity of our lifetimes, but there are a lot of things that have to lock into place to make that happen. The most important off all is that banks have to again begin lending to consumers and to each other. Taking TARP money and hoarding it, or using it for buyouts - something our ongoing Money Morning coverage has chronicled - just isn't acceptable. If the banks won't play ball, the government should force them to … or take the money back and let them fail.

Now is not the time to play partisan politics either. This crisis is serious enough that we need to concentrate on just being Americans and work through this as quickly and expediently as possible. Washington is only just beginning to understand how serious this crisis is, which means as investors we have to take our personal financial security into our own hands. The unfortunate reality is that the government may not get around to protecting our personal financial security - despite our elected officials best intentions.

MM: In a bit of financial irony, you've pointed out to lots of folks that China will actually benefit from this financial crisis, using it to enhance its stature in the global financial community. And no one is better positioned than you to understand how China will fare … you run an annual investment trip to that country each year and you have a substantial network of contacts there. Given that perspective, tell us how China can benefit from this situation.

KF: Absolutely. First of all, China has $2 trillion in reserves … the most in history and the highest stockpile as a percentage of GDP on the planet. This gives China not only the clout to spend its way out of this mess, but the muscle to work with the rest of the world in a controlled, measured fashion that helps maintain global financial balance. Clearly, a lot of people on Wall Street won't like the fact that they don't call the shots anymore, but they had their chance. Now they need to let someone else lead.

From an investment standpoint, I think it's particularly ironic that the global financial crisis - more so than any other factor - may be the catalyst that ultimately transforms China into the investment of a lifetime. Even during the depths of the Asian Financial Crisis a decade ago, I don't' recall seeing Chinese markets this undervalued relative to the upside profit potential.

MM: What about Japan? The Japanese yen has traditionally been a safe haven during troubled times.
KF: Yes it has, but I think that could come crashing to an end this time around.

Japan bailed itself out the last time around through a massive stimulus program aimed at exports. But it did little to stimulate the domestic economy and that's costing the country dearly this time around, because now it's behind the proverbial eight ball. In fact, there are some indications that Japan may be sinking into another "Lost Decade" that's even worse than the malaise we face here in the United States. It's not illogical to assume the yen could fall off the cliff and crash as a result.

I'll be home again in Kyoto shortly and will update you on what I find when I get there.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will quickly and painfully determine the winners and losers out in the global financial markets. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

In fact, Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." His key discovery: Despite the gloom brought about by the ongoing financial crisis, we may actually be standing on the precipice of the greatest investing opportunities we'll see in our lifetimes. To capitalize, today more than ever, investors need to employ the correct tool. In his newly launched Time Trader Pro investing service, Fitz-Gerald feels that he's found that needed device. Time Trader Pro, developed after more thana decade of work, is a new computerized trading model that's based on a mathematical concept known as "fractals." This system allows Fitz-Gerald to predict price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the "trendless" markets that are the norm today. Check out our latest report on these new rules, this new market environment, and this new service, Time Trader Pro.]

News and Related Story Links: