Keith Fitz-Gerald

Be Selectively Bullish During the Financial Crisis

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I've been called a lot of names lately.

Nut job. Alarmist. Fear monger. Dr. Doom.

I've heard them all.

When you make your living as a financial analyst and commentator, as I do, you aren't going to get a lot of invitations to the ol' country club - especially if you spend a lot of time spotlighting the problems that are created by greedy Wall Streeters, sleepwalking regulators, or indentured elected officials.

But when you repeatedly warn investors that the U.S. financial system is on a collision course with disaster, and state that some investors will experience "extinction-level events" -- and when you broadcast these warnings when virtually everyone else is in denial and is dismissing the market problems as "minor" -- you're bound to become a marketplace pariah.

Until, of course, your predictions are proven correct.

They Won't Like This Either

We may be hearing from my critics again -- and soon -- for I've got another prediction they aren't going to like.

There clearly are countries -- such as the United States and much of the European Union -- that are going to collapse into recession, even if only unofficially. But this doesn't necessarily have to evolve into a global recession -- a position that most of the traditional Wall Street establishment disagrees with, by the way.

Let's take a look at several of Wall Street's current misconceptions -- and see why I'm selectively bullish:

* The Red Dragon (China) is ready to hibernate: Wall Street is worried that a U.S.-induced recession will slay the Red Dragon. There's no way. If a country can fall into a recession when its economy (as measured by gross domestic product, or GDP) is advancing at a 9.6% clip -- at a time when its U.S. counterpart will be lucky to eke out a 1.0% growth rate -- well, I'll eat my hat.

The Armani Army, in its infinite wisdom, is worried about a recession in China even though its $1.9 trillion in foreign reserves are more than 32.10% of GDP and external debt is a miniscule 7.6% of GDP (external debt is defined as the amount of debt that China owes external creditors, including consumers, central governments and commercial institutions, according to the CIA Fact Book). By contrast, the U.S. reserves are 4.84% of GDP, while external debt is 84%. The United Kingdom and Switzerland are in even worse shape, with external debt of 382.2% and 279.1%, respectively.

* China won't be able to survive a drop-off in exports to the United States: Then there's the myth of China's export economy. The last time China took a header and export business dropped by 35%, its GDP dropped by less than 1%. I'm betting it will be an even smaller bump this time around, especially since China's middle class now is increasingly responsible for internal growth -- independent of what China exports to the rest of the world.

* The Asian economies are an economic train wreck just waiting to happen: This was true a decade ago, when the United States and Western Europe held all the cash. But no longer.

Today, nations such as Singapore, Thailand and Malaysia are running trade surpluses. So is Canada. That suggests that the currencies of these countries are significantly undervalued at a time when their economies are increasingly tied to that of China. What does that tell us? Today, China is the growth engine of Asia; tomorrow, it will be the growth engine of the world.

* The U.S. economy remains the financial center of the world: Today, an estimated 78% of global economic activity takes place outside U.S. borders, which means that even in a recession, an increasing amount of capital circulates beyond the U.S. shores.

Indeed, the U.S. stock market now represents less than 30% of total world market capitalization, down from roughly 45% as recently as 2004. Don't be surprised to see the United States continue to decline in economic relevance. One day, the lion's share of the financial trades will take place beyond U.S. borders.