The Thrill of a Financial Crisis

by Eric Fry
financial crisis 0

Most investors run away from a crisis when they should be running toward it. A really nasty crisis can create the kind of panic that causes stock prices to plummet... and plummet some more... until a great buying opportunity emerges.

Sometimes these crisis opportunities are political in nature; sometimes they’re monetary. Other times they’re the result of war or natural disasters; or they’re a combination of all of the above.

The one unifying trait is that the crisis scares the daylights out of investors, causing them to panic and dump their investments... until prices fall to levels that would have seemed unimaginable during the boom times.

Opportunities like these don’t come strolling down the sidewalk very often. They are rare. And yet, despite their rarity and enormous profit potential, most investors prefer to keep their distance.

They consider crisis investing to be an extreme sport - the X Games of the financial world. They imagine the “crisis investor” to be the guy who dons a wingsuit on the weekend, straps a GoPro to his head and jumps off the top of Half Dome.

This perception is not entirely off base, but it is misleading. Certainly, a depressed market can be dangerous. It can become even more depressed before it turns the corner and begins a decisive move to the upside.

On the other hand, a crisis market is a market that is trading at deeply depressed levels. There is no fluff or hype priced into it, only pessimism and capitulation.

That’s when outstanding investment opportunities present themselves. The chart below shows three crisis investment opportunities from the last two decades...

  • Thai stocks after the Asian currency crisis of 1997
  • Argentine stocks after the currency crisis in 2002
  • U.S. stocks after the 2008 crisis.

But unlike typical charts of this sort, the results it shows are not the maximum gain an investor could have made by investing at the precise bottom of the market. Instead, this chart shows what an investor could have made by investing early - three months before the precise bottom.

The chart also shows the mark-to-market losses an investor would have endured while waiting for the market to make its final low...

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Today in the U.S., crisis investing opportunities seem nonexistent. Nine years have passed since the 2008 financial crisis pushed the U.S. economy to the brink of depression.

Since then, the S&P 500 Index has produced a whopping 340% gain and is trading close to record-high valuations. You won’t find any bargains in the Treasury bond market either. Yields are close to the lowest levels ever. U.S. real estate has also enjoyed a multiyear upswing.

The world around us seems fully priced. But there is at least one crisis investment that dwells in our midst: uranium.

The Fukushima earthquake and tsunami of 2011 caused a major crisis in the uranium market... and this crisis hasn’t ended yet. In the aftermath of the Fukushima disaster, Japan shuttered all 54 of its nuclear reactors - 12% of the world total at the time.

As a result, net global demand for uranium went “poof”... and the price of uranium plummeted...

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Today, the uranium price is languishing around $20 a pound, which is well below what it costs most miners to pull the stuff out of the ground.

But six years have passed since the Fukushima disaster, and the nuclear power industry has continued to put one foot in front of the other.

Countries like China, India and South Korea are actively ramping up their installed nuclear power capacity. Thirty-seven new nuclear reactors have come online since 2011, and 54 more are under construction. In addition to these projects, 146 more reactors are “on order or planned,” according to the World Nuclear Association.

That’s a total of 200 nukes that are either under construction or planned, which happens to be about double the 99 nukes that are currently operating in the U.S.

So even if the U.S. has little appetite to add to its nuclear power capacity, many countries around the world are eager to do so.

Another reason to expect the uranium price to come alive is that Japan is restarting many of the nukes it shut down in 2011. So far, only five reactors are back online. But 21 restart applications are pending with regulatory authorities.

So as Japan restarts its reactors and other nations around the globe construct brand-new reactors, demand for uranium will continue to increase. That’s a big part of the reason why I expect the uranium price to move higher over the next few years.

The uranium market is still reeling from its six-year crisis. But this crisis may be ending very soon.

Good investing,

Eric

Thoughts on this article? Leave a comment below.

P.S. For more of Eric’s insights into global economics and commodities markets, check out Fry’s Pinnacle Portfolio.

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