Why investors decide not to see these threats

Thursday, 21 September 2017
Melbourne, Australia
By Bernd Struben

  • Too horrendous to contemplate
  • More than just North Korea
  • This sector just keeps growing

The hardest thing to explain is the glaringly evident which everybody has decided not to see.’

Ayn Rand, The Fountainhead

Maybe I’m wrong. It wouldn’t be the first time. In fact, in this case, I certainly hope I am.

But I would be remiss in my duties as your editor if I didn’t at least try to explain the glaringly evident crises at Australia’s doorstep. Crises everybody — at least in the markets — appears to have decided not to see.

Both calamities revolve around the powder keg that is North Korea.

The first involves the US entering a shooting war with Kim Jong-un’s regime. A conflict that might well see nuclear weapons used for the first time since 1945. And one that would almost certainly see Australia drawn into the battle.

Former prime minister Kevin Rudd — currently the president of the Asia Society Policy Institute — believes there is a 20–25% chance of a shooting war breaking out.

That’s only his guess, of course. And I can only guess here myself. But those odds sound plausible. And they’re big enough that you shouldn’t ignore them.

The second — and I believe far more likely — crisis unfolding before our eyes is a global trade war. One that will begin between the US and China, but will see other nations forced to take sides.

Tensions over North Korea may well be the trigger to set that trade war into motion. But even without Kim’s provocations, the Trump administration has been itching to ramp up tariffs on China. As you may recall, while campaigning for the presidency, Trump called China a ‘currency manipulator’.

Now, all of this is getting plenty of media coverage. Both from the mainstream, and from those of us who try to provide you with independent and alternate ideas. Yet it seems investors have firmly decided not to see the threats.

In the US, markets even continue to set new record highs.

We’ll pause here for a quick look at those markets now.

Markets

Overnight, the Dow Jones Industrial Average gained 41.79 points, or 0.19%.

The S&P 500 added 1.59 points, or 0.06%.

In Europe, the Euro Stoxx 50 index finished down 5.63 points, or 0.16%. Meanwhile, the FTSE 100 lost 0.05%, and Germany’s DAX index rose 0.06%.

In Asian markets, Japan’s Nikkei 225 index is up 67.58 points, or 0.33%. China’s CSI 300 is up 0.21%.

In Australia, the S&P/ASX 200 is down 42.29 points, or 0.74%.

On the commodities markets, West Texas Intermediate crude oil is US$50.68 per barrel. Brent crude is US$56.15 per barrel.

Gold is trading for US$1,299.27 (AU$1,623.28) per troy ounce. Silver is US$17.1 1 (AU$21.38) per troy ounce.

One bitcoin is worth US$3,853.99.

The Aussie dollar is worth 80.04 US cents.

Too horrendous to contemplate

If there was a 25% chance of a cyclone striking your neighbourhood, you’d probably take some time to prepare.

Yet investors across the globe have taken surprisingly few steps to prepare for the very real possibility of armed conflict between the US and its allies and North Korea.

That’s probably because the outcome of an armed conflict — particularly a nuclear one — is too horrendous to seriously consider. So horrendous that surely it won’t happen.

Unless it does.

Speaking at the United Nations General Assembly, Trump did a lot more than leave that door open.

From The Australian Financial Review (AFR):

US President Donald Trump escalated his threats against North Korea over its nuclear challenge, threatening to “totally destroy” the country of 26 million people and mocking its leader, Kim Jong Un, as a “rocket man.”…

As loud, startled murmurs filled the hall, Trump described Kim in an acid tone, saying, “Rocket man is on a suicide mission for himself and his regime.”…

In what may have been a veiled prod at China, the North’s major trading partner, Trump said: “It is an outrage that some nations would not only trade with such a regime but would arm, supply and financially support a country that imperils the world with nuclear conflict.”…

Financial markets showed little reaction to Trump’s speech, with most major assets hovering near the unchanged mark on the day.’

The most powerful man in the world threatens to ‘totally destroy’ a nation of 26 million people. And financial markets showed little reaction…

But it’s not just the US ratcheting up the pressure.

Japanese Prime Minister Shinzo Abe — though not as bellicose as Trump — says the time for talks is over.

From the AFR:

“Now is not the time for dialogue. Now is the time to apply pressure,” Abe told a gathering of investors at the New York Stock Exchange, remarks he later reiterated in an address to the annual United Nations General Assembly…

“We can’t be satisfied that the UN has approved new sanctions against North Korea,” Abe said. “What’s crucial now is to put sanctions into effect without lapses and that requires close cooperation with China and Russia.”…

Abe said Japan, a treaty ally of the United States, consistently supported the US stance that “all options are on the table” in dealing with North Korea.’

Abe’s concerns are well warranted. Japan finds itself at ground zero in any major military escalation. Only last Friday Kim Jong-un’s regime fired its latest ballistic missile over Japanese territory.

You don’t have to read between the lines to see that Abe is well aware war may break out.

While this is horrendous to contemplate, you shouldn’t decide not to see it.

From an investors’ perspective, defence-oriented companies like Lockheed Martin Corporation [NYSE:LMT] should continue to do well, whether war breaks out or the sanctions drag on. LMT shares gained 0.74% in yesterday’s trading. And they’re up 23.19% year-to-date.

Increasing your exposure to gold is something else to consider. I recommend a combination of physical gold and gold stocks.

Gold stocks can be risky, though. Especially the junior miners. But if the gold price takes off on increasing fears of war, their share prices should soar. You can find some of the most promising Aussie gold stocks here.

More than just North Korea

I mentioned above that Kevin Rudd’s 20–25% estimate of the standoff devolving into armed conflict appears to be in the ballpark. But I believe the chances of a trade war with China are far higher.

As Shinzo Abe pointed out, China and Russia pose the biggest hurdles to a more stringent embargo. Not to mention even enforcing the sanctions already agreed upon by the UN.

China finds itself in a delicate spot.

A global trade war would certainly hurt its export-oriented economy, not to mention dragging down economies across the world. Yet China doesn’t want to see Kim’s regime toppled and replaced by a government friendly to the West right on its doorstep.

And the sanctions are not only hurting North Korea, but Chinese businesses as well. Particularly those close to the border.

As Bloomberg notes:

Towns on the southeast fringe of China’s rust belt were already struggling with the decline of heavy industries such as steelmaking and coal mining before becoming collateral damage in the U.S.-led push to isolate North Korea. The risk of social unrest due to job losses is a sensitive issue for Chinese President Xi Jinping…

So while U.S. President Donald Trump has threatened a trade war if Xi doesn’t use his economic leverage to curb North Korea’s nuclear ambitions, authorities in Beijing need to also weigh the domestic cost of implementing sanctions…

According to data compiled by the Observatory of Economic Complexity, an MIT project, China supplied 85 percent of North Korea’s $3.47 billion in imports in 2015 and absorbed a similar share of its $2.83 billion in exports.’

But the Trump administration is playing hardball.

Last week, US Treasury Secretary Steve Mnuchin upped the ante, saying, ‘If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful.’

Restricting China’s access to the SWIFT system, which allows for international transactions in dollars, may backfire longer term by encouraging China and its trade partners to move further away from the US dollar. But its immediate impact would certainly throw markets into a tailspin.

Yet the spectre of a trade war stems from more than just the standoff over North Korea.

The US has long had a massive trade imbalance with the Middle Kingdom, as you can see below.



chart image

Source: Bloomberg
Click to enlarge


This trade imbalance has been blamed — rightly or wrongly — on the loss of US manufacturing and other jobs. Meaning Trump will have a good bit of support from his base supporters if he pursues a new round of tariffs and other trade limits with China.

From the AFR:

US Trade Representative Robert Lighthizer warned that China was a “substantially more difficult” challenge than those faced in the past.

“The sheer scale of their coordinated effort to develop their economy; to subsidise, to create national champions; to force technology transfers and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented,” he said.’

We’ll leave the shooting and trade war scenarios at that for today. Not terribly uplifting, I know.

Yet ignoring the very real possibility won’t be to your advantage.

If a trade war between the US and China does break out, a lot of Aussie industries will be hit hard. Iron ore and coal will be among the casualties. And we’d likely see the recently booming Chinese tourist trade taper off as well.

But one burgeoning new industry, I believe, will be largely unfazed by a trade war.

This sector just keeps growing

The global push for marijuana legalisation is on a tear. And the best ‘pot stocks’ are riding the boom to new highs. (Sorry, couldn’t resist the pun!)

I’ve covered the fast-moving trend in the US before, with ever more states moving to legalise medicinal and even recreational marijuana. And then there’s Canada, which looks to fully legalise recreational use across the nation next year.

But the legalisation wave isn’t limited to the Americas. Or to Australia, for that matter, where medicinal use was legalised last year.

Lesotho, a nation of two million surrounded by South Africa, has just dipped its toe into the lucrative waters of legalised cannabis. It’s the first African nation to take this step. Though almost certainly not the last.

As Quartz Africa reports:

Lesotho has become the first African country to grant a license for medicinal marijuana. The country’s health ministry licensed Verve Dynamics, a South African company that describes itself as “a vegan friendly manufacturer of highly purified botanical extracts and specialty ingredients.”

Lesotho’s decision to view marijuana as a source of national revenue rather than petty crime marks a shift in a region where marijuana is widely used and regularly exported across borders.’

This news did not come as a surprise to our resident tech guru — and pot stock expert — Sam Volkering. Here’s what he emailed me this morning:

​‘Anyone that thinks this is just a short term opportunity is blind. Within the next five years there will more countries with legal marijuana than those that continue to live in the dark ages and outlaw it.

Legalisation of marijuana globally is one of the great phenomenon of the 21st century that’s only just starting to gain momentum. Get on board the “Puffing Billy” train now before it leaves the station without you.’

Sam has been atop this story for two years now. And he’s recommended his three favourite stocks to play this booming industry to subscribers of Revolutionary Tech Insider.

You might be asking: What do cannabis companies have to do with revolutionary technology developments? Good question!

Sam’s focus is on far more than the legalisation of recreational use. That will certainly put a rocket under the best pot stocks. But it’s the medicinal angle where Sam really sees some phenomenal growth ahead. And the latest medical studies being done with marijuana are nothing short of revolutionary.

Here’s what Sam wrote to subscribers of Revolutionary Tech Insider this morning:

We’ve been researching the marijuana industry for almost two years now. And the more we delve into it, the more we’re convinced this is the single biggest medical breakthrough since the discovery and development of penicillin.

When you consider the impact penicillin had on the world and the medical profession, our view is that marijuana is set to leave that revolution for dust. The marijuana revolution is just getting started and is set to be enormous.

Even if the US engages China in a high-stakes trade war, this is one sector I believe will continue to enjoy rapid growth.

You can find out all about Sam’s top three cannabis companies here.

Cheers,
Bernd