The Markets or the Mattress: I Know Where My Money is Going

Keith Fitz-Gerald

The next 1,000 points on the Dow Jones Industrial Average in either direction are going to be determined by what happens in two cities thousands of miles from our own shores...
Athens and Berlin.

What's more, the risks associated with Europe's redemption, or its failure, are more concentrated now than they were before the crisis began.

There are two reasons: a) Europe won't help itself and b) Wall Street may still have $1 trillion or more in exposure to European problems.

What makes me crazy right now is that European chatter is what's driving the markets.

Every sound bite from Europe is critical these days. Not because there is anything relevant in the political babbling from financial ministers tasked with fixing this mess, but rather that there is a cascade of events that could take us in either direction.

Fix this mess and the markets will take off for a 1,000 point gain that will leave anybody who is on the sidelines hopelessly behind.

Fail and the markets could tank.

It certainly fits the pattern established in recent months. News leaks suggesting solutions have brought on rallies, while negative leaks have caused a ripple effect that has quickly dumped stocks into the hopper.

Yet, it's not really the numbers that matter at the moment - even with the Fed rumored to be considering another $1 trillion stimulus and reports that the European Central Bank (ECB) and International Monetary Fund (IMF) may be seeking as much as $600 billion each.

No. The market swings we are seeing are all about confidence or, more specifically, the near complete lack thereof.

The Mattress vs. The Markets

A recent report from TrimTabs shows that checking and savings accounts attracted eight-times the money that stock, bond and mutual funds did from January to November 2011.

That is a whopping $889 billion that went under "the mattresses" versus only $109 billion that went into the markets.

In fact, CNBC is reporting that the pace of money headed for plain-Jane savings and checking accounts from September to November accelerated to nearly 13-times the average monthly flow rate of the preceding nine months from September to November.

What's significant about this is that the money has headed for the sidelines when the markets have rallied. Usually it's the other way around. Normally money floods into the markets when they move higher.

The other notable thing here is that, generally speaking, up days this year have had thinner volume than down days. This means that most investors just can't handle the swings. In other words, every time the markets dip, they're packing it in.

Pessimism is the Breeding Ground of Opportunity

Bottom line: Investors are making a gigantic mistake - especially those with a longer-term perspective.

Periods of maximum pessimism - when everybody "knows" something - usually make for a variety of great buying opportunities.

For instance, do you remember the following quote?

"The economy is staggering under many "structural' burdens, as opposed to familiar problems.

The structural faults [...] will take years to work out. Among them the job drought; the debt hangover; the banking collapse; the real estate depression; the healthcare cost explosion and the runaway federal deficit."

I remember it like it was yesterday.

It's from TIME magazine in September 1992 - right before the markets took off on a breathtaking 16-year run.

To be clear here, I am not suggesting that the markets are about to go on a triple percentage point bender, only that investors would be foolish to ignore the possibility.

In fact, the very notion that Wall Street remains in denial about Europe and Europe itself still refuses to confront the seriousness of its situation bodes well for almost anybody willing to go against the grain.

That's been the case throughout history.

Take the Panic of 1873. It was the world's first truly international financial crisis and, by many measures, actually far worse than what we're dealing with now.

Things were so bad that more than 18,000 businesses closed, sending unemployment soaring to 14%. The NYSE even closed for ten days.

The depression that started in 1873 lasted until 1879 here in the United States and another 20 years in Britain -- where it's known as the "Long Depression" in history books.

Yet through it all, the market's dips, twists and turns turned out to be extraordinary buying opportunities. (You can learn more about a similar opportunity that I recently discovered in today's markets by clicking here.)

The same thing ultimately will be true today, especially if you're building long-term investment positions in "glocal" stocks with experienced management and fortress-like balance sheets that produce high dividends.

I feel the same way about energy, commodities and very specific microcap companies with promising inventions, medical technology or some other catalyst that can create game-changing returns.

It takes a lot of nerve, but that's how the markets work.

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Keith Fitz-Gerald

About the Author

Browse Keith's articles | View Keith's research services

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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