MAD or just plain mad?

Thursday, 10 August 2017
Melbourne, Australia
By Bernd Struben

  • A nuclear ‘police action’
  • It’s only a matter of time…
  • In the mailbag

The drums of war continue to sound on both sides of the Pacific.

Despite US Secretary of State Rex Tillerson’s attempts to defuse mounting tensions, Kim Jong-un is having none of it.

From The Australian:

North Korea has renewed its threat to attack Guam, saying it would launch four intermediate-range missile [sic] simultaneously against the US territory, calling Donald Trump’s threats a “load of nonsense.”

Stating that “only absolute force” can work on Mr Trump, the commander of Strategic Forces of the Korean People’s Army General Kim Ran Gyom said it was “seriously examining” an attack “to signal a crucial warning to the US”…

Foreign Minister Julie Bishop says Australia and other countries are trying to avoid a “nightmare” outcome… The capacity for such a strike would also put Australia in reach, which Ms Bishop this morning conceded was an “unacceptable existential threat to our country”.

The threat of nuclear war is nothing new. It’s been hanging over our heads since 6 August 1945. That’s when the US unleashed the first ever nuclear weapon on Hiroshima. Three days later the US dropped a second nuclear bomb on Nagasaki, forcing the Japanese surrender.

By the time I came into this world in 1968, the US and Japan were good friends. The Soviet Union was the new enemy we were supposed to hate and fear. And there was plenty to fear.

Growing up in Fairfax County, Virginia, we may as well have had a giant bullseye circling our home. We were less than 10 kilometres from the Pentagon. Perhaps 15 kilometres from the White House. Roughly 20 kilometres from the not-so-secret NSA headquarters location. And a mere five kilometres from the CIA’s Langley command centre.

If the bombs were going to fly, we would have front-row seats. Not that this stopped our schools from conducting survival drills. Drills which had us ducking beneath our desks, impatiently waiting for the teacher to give the all clear.

Of course, those desks — and the students beneath them — would have been reduced to cinders in an all-out nuclear exchange.

Though the risk was very real, there was something holding both sides back. Something you may have heard referred to as MAD. It stands for Mutual Assured Destruction. That’s because the US and Soviet Union had stockpiled enough nuclear missiles to destroy each other several times over.

It was, and remains, an effective stalemate. If either side were to launch a first strike, they would be signing their own death warrant.

Unfortunately, that is far from the case in the escalating standoff between the US and North Korea.

Whether Kim has as many as 60 nuclear devices at his disposal — as US intelligence agencies now dubiously suggest — or not, North Korea has no hope of assuring US destruction. Far from it.

That’s not to say Kim’s regime couldn’t inflict massive damage to South Korea, Japan, Guam, and perhaps even strike a city in the US mainland. But that kind of threat only fans Western fears. And only makes it more likely that Donald Trump may order pre-emptive strikes. That’s not MAD…just mad.

Yet many Aussie investors are shrugging off the dire implications. As I wrote in yesterday’s Port Phillip Insider, it may be because the concept of nuclear war is so abhorrent that it’s unthinkable.

More after the markets…

Markets

Overnight, the Dow Jones Industrial Average lost 36.64 points, or 0.17%.

The S&P 500 lost 0.90 points, or 0.04%.

In Europe, the Euro Stoxx 50 index closed down 47.18 points, or 1.34%. Meanwhile, the FTSE 100 lost 0.59%, and Germany’s DAX index fell 1.12%.

In Asian markets, Japan’s Nikkei 225 index is down 16.12 points, or 0.08%. China’s CSI 300 is down 0.62%.

In Australia, the S&P/ASX 200 is down 4.80 points, or 0.08%.

On the commodities markets, West Texas Intermediate crude oil is US$49.61 per barrel. Brent crude is US$52.74 per barrel.

Gold is trading for US$1,275.38 (AU$1,614.81) per troy ounce. Silver is US$16.88 (AU$21.37) per troy ounce.

One bitcoin is worth US$3,376.52.

The Aussie dollar is worth 78.98 US cents.

A nuclear ‘police action’

Apparently unfazed by the nuclear-tipped sabre-rattling, many Australian investors continue on with the business at hand.

Despite losses in US and Asian markets yesterday, the ASX 200 finished the day up 0.4%. And it started today strongly again. The index was up 0.5% in morning trading before reversing direction. As at writing it’s down 0.08%.

Investors have largely been pleased by some strong reporting results as we approach the end of the second week of earnings season. Business confidence is high. And interest rates remain at record lows.

Still, when I read headlines like the following from Bloomberg, my caution flag goes up: ‘Asia Stems Equity Drop as Angst Fades’.

Asian stocks largely halted the slide triggered by an escalation in tensions between the U.S. and North Korea as American officials tried to ease concerns that sparked a flight to safe-haven assets…

Gold slipped 0.2 percent to $1,275.39 an ounce after surging 1.3 percent on Wednesday.

West Texas Intermediate crude added 0.1 percent to $49.62 a barrel after climbing 0.8 percent the previous session.’

And this one from The Australian Business Review: ‘North Korea crisis: Share markets don’t buy war threat yet’.

The gold price is edging higher but the share and bond market currently do not believe that President Trump will carry out his thinly veiled threat to bomb North Korea or that the rogue state will attack the US… But just as we saw with Japan in 1941 (and a series of other failed sanction attempts) it is very hard for a rhetoric driven leader like Kim Jong-un to back down…

Investors should be alert that if markets suddenly rate atomic or even conventional war with Korea as imminent we will see a big fall so keep watching.

That last line is important. You see, it won’t require an actual war to see markets take a big fall. It only takes a number of investors — not even the majority — to perceive the threat as real. If enough begin selling, others will panic and try to lock in gains or minimise losses.

Now, don’t rush out to sell all of your stocks right now. Though any peaceful resolution with North Korea is likely many years away, the latest escalation could blow over without any shots being fired.

But don’t forget who’s involved here.

You have an isolated Kim Jong-un backed into a corner on one side. And a frustrated Donald Trump on the other. Frustrated not just with North Korea’s belligerence. But with his own mounting failures at home. Stymied by Congress, Trump has seen his signature healthcare, immigration and tax reforms go absolutely nowhere.

Yet Trump indisputably remains the Commander in Chief of the US military. Article One, Section Eight of the US Constitution stipulates that only Congress has the power to declare war. But past presidents have shown how easily they can do an end-run around this restriction. The (First) Korean War and the Vietnam War were, after all, merely ‘police actions’.

So keep a close eye on the situation and review your portfolio. You might want to rebalance into some relatively safer assets.

Gold is certainly one to consider. The yellow metal is up 1.6% since Monday. That brings the year-to-date return to 11.3%, as you can see below.



chart image

Source: Bloomberg
Click to enlarge

Though gold’s been trading in a pretty tight range since early April, any further escalation in tensions with North Korea should see it head sharply higher. And when gold surges, gold mining stocks tend to move far more than the gold price.

Owning gold bullion is definitely something we recommend. As is putting some of your investable income into gold mining stocks. Resource analyst Jason Stevenson has handpicked some of the best junior gold mining stocks on the ASX. If gold takes off on rising fears of war, these ‘penny gold’ stocks could double…or more…within days.

You can find all the details here.

It’s only a matter of time…

Aside from gold, cryptocurrencies are also likely to be seen as a haven in times of global conflict. As a truly borderless currency, and one free from central bank manipulation, you can see why.

Yet many cryptos, such as Bitcoin, have delivered incredible returns even before the spectre of nuclear war began heating up. Bitcoin, for example, is up 238% since 1 January. As it gains traction in the mainstream, those returns could be dwarfed in the months ahead. And that traction looks to be taking hold fast.

As Reuters reports:

Fidelity Investments has started allowing clients to use its website to view their holdings of bitcoin and other cryptocurrencies held through digital wallet provider Coinbase, the company said on Wednesday.

The initiative, previously tested with the Boston-based money manager’s employees, is a rare example of an established financial services company warming up to cryptocurrencies.’

This latest development comes as no surprise to our in-house technology and crypto expert, Sam Volkering. Here’s what he told me this morning,

There’s so much money still sitting waiting, not sure how to get into bitcoin. But all the major institutions are looking at it. It’s only a matter of time until they provide access to millions of clients to invest in it and billions…trillions flow into it.

As I mentioned yesterday, bitcoin is the biggest and most well-known of the cryptocurrencies in ‘circulation’. But there are more than 900 out there today. With new ones hitting the market all the time.

Over at Revolutionary Tech Investor, Sam is always on the lookout for the next crypto breakthrough. One that could go from 10 cents to $100…or more. He recently recommended a brand new crypto, which hasn’t even launched yet. One he believes could deliver exactly those types of eye popping gains.

You can find out all about it here.

In the mailbag

The Port Phillip Insider inbox, letters@portphillipinsider.com.au, hasn’t exactly been overflowing with emails. Though I did get the following mail from Phil Anderson last night…complete with a handy graph.

You’ve probably heard of Phil. He’s the editor of, and brains behind, Cycles, Trends and Forecasts. You can check his work out here.

Hi Bernd,

I just read today’s Insider about black swan events.

In truth, I reckon there’s no such thing as a black swan event at all. It all depends on where these things happen within the real estate cycle.

Here’s what I mean by that…

If an “unexpected” event happens during the cycle when things are going quite well — and not a lot of bank credit has been created yet — people will shrug and just get on with their business. The economy will cope with it well enough.

But if an “unexpected” event happens right towards the end of the first half of the cycle (in this case that will be 2019), or even more so if it happens towards the extreme end of the cycle (2028) the economy is ‘set up’ for an event right at the moment when it can least handle it. Meaning after the huge credit build up has already taken place.

That’s when all the credit issued by banks has built the economy on (and into) “quicksand”.

So if the event is big enough to “scare” people during those periods, then it could get ugly.

Hence at real estate cycle extremes we get so many “events” that push the economy over the edge. The event itself isn’t any different to any other event. It’s just that so much debt and credit has built up, something has to give. They then get labeled “black swan events” when they really aren’t anything of the sort.

They’re just normal events that have happened from time to time in history. So it depends WHEN in the real estate cycle they happen.

Here’s another way to look at things. It’s a chart of when the US has been at war (since 1945) with some other nation, which I’ve related to the Dow.



chart image

Source: Time Trader
Click to enlarge

You can see that really — as expressed through US markets — war makes little difference to the US economy overall. Unless it really is a genuine “world” war.

It’s far better for investors to worry about the real estate cycle and how it builds into its repeatable — and highly forecastable — real estate cycle.

Readers who can overlay the timing of the 18.6 real estate cycle to the above chart can easily see what I mean.’

I love Phil’s work. It’s not always easy to understand. But when you do wrap your head around it, the knowledge he so willingly shares can make all the difference between buying in near the top of the market…or right near the bottom.

Learn more here.

Cheers,
Bernd