Three Ways to Protect Yourself from North Korea’s “Ballistic Brinksmanship”
North Korean strongman Kim Jung-un did the unthinkable and launched a missile over Japan on Tuesday.
Tens of thousands of cell phones went off at once at 6:02 a.m. when that nation’s government alerted citizens to the launch.
NHK – the nation’s largest public broadcasting network – simultaneously flashed a “black screen” warning that the missile was approaching Japan and that everyone in its flight path should immediately take cover.
Air raid sirens blared in Sapporo on Hokkaido, Japan’s northernmost island.
People took cover.
Fourteen minutes later, things returned to “normal” when the missile fell into the Pacific.
But, what exactly does that mean… normal?
That’s hard to say.
My take is that the markets shook off the North Korean missile launch because traders realized very quickly that the situation did not go from bad to worse.
[SPECIAL BRIEFING] “Dozens” of horrific new superweapons were recently aimed at the U.S.S. Ronald Reagan on patrol in the South China Sea, nearly igniting a war, according to Chinese state-run television. And every American needs to know about it before it’s too late.
In years past something like this would have caused a massive selloff but now – sadly – the financial markets have learned to live with one of the biggest of the six Unstoppable Trends we follow: War, Terrorism & Ugliness.
That said, I don’t think we’re out of the woods by a long shot.
In fact, I think the situation is going to get far more dangerous before it gets better.
Developing nuclear weapons is Kim’s insurance policy because it all but guarantees the world will not mess with him, let alone sanction him or overthrow him with a U.S.-led coalition.
That means the possibility of a “hot war” is very real, and very dangerous for your money.
Forget the notion of a pre-emptive strike or a limited engagement that’s being bandied about. That’s wishful thinking at best, and incredibly naïve at worst. Even a single missile fired pre-emptively in anger is going to have devastating consequences.
More than 20 million South Koreans live within artillery range of North Korea and that means nuclear weapons aren’t the only cause for worries here. Chemical and biological weapons are, too.
Not only could Kim order a strike that takes out key South Korean infrastructure (including many United States military assets) but he could lob a few regional missiles into Japan, bringing that nation unspeakable horror the likes of which haven’t been seen since WWII.
Practically speaking, North Korea has very little to lose. Defense expert Jonathan Pollack, a senior fellow at the Brookings Institute put it this way in Vox, noting that “there wouldn’t be a lot of incentive for [North Korean] restraint.”
If Kim Jung-un believes he’s going to lose even for a second, he will push every button at his disposal.
Even the button (controlling his nukes).
Kim’s in so deep that he cannot back off without losing face and possibly control at the same time.
Worse, unlike other dictators over the years who have fled at the eleventh hour, Kim is so hated he likely has nowhere to go. He will make a last stand both literally and figuratively because he has no other choice.
The only thing to do now is figure out what that looks like and how it plays out.
I’m not trying to ruin your day. In fact, quite the opposite is true.
One of the things I promised you when we started Total Wealth was that we would be taking a good hard look at the events of our time… even when they involve things that are so unpleasant we’d rather not.
Like War, Terrorism & Ugliness.
It’s one of our Unstoppable Trends and, admittedly, the one I hate talking about if for no other reason than I am the father of two teenage boys, one of whom is draft age and who lives in Tokyo.
But, we have to.
I wouldn’t be doing my job as Chief Investment Strategist if we didn’t.
War, Terrorism & Ugliness is a growth industry that encompasses the best and worst of what humanity and the financial markets have to offer at the same time.
With that in mind, we have to hunt for ways to protect and grow our money with it just as we would with any other Unstoppable Trend.
Starting with answers to the most pressing questions I’m getting at the moment.
Q – What will an actual strike mean for global markets?
Initially there will be a huge hit based on the unknown nature of how the world responds and what that looks like. That’s as much a function of high speed computers that now drive 70% or more of all trading volume as it is the huge amounts of leverage in today’s financial markets.
I’ve spoken confidentially with strategists – both military and otherwise – who believe that Kim will send everything he has over the border immediately, as well as lob missiles at South Korea, Japan, and America – in that order.
There’s simply not a whole lot of precedent to draw on.
If the damage is containable the markets will bottom quickly, albeit probably at least 5%-10% lower… and likely in a single trading session that makes the 500-day single point Brexantrum last June look like a walk in the park.
The situation strikes me as very much like a high-stakes game of thermonuclear chicken – meaning one side blinks and it’s back to normal, or neither blinks and the world enters truly uncharted territory.
The temptation to sell everything will be extreme for most investors, but I wouldn’t advocate doing so unless you absolutely have to.
Instead, I’d make up a short list of companies you’ve been wanting to buy but haven’t because they’re so expensive… i.e. the “fabulous five” techies including Alphabet Inc. (NasdaqGS:GOOG), Amazon.com Inc. (NasdaqGS:AMZN) and Facebook Inc. (NasdaqGS:FB).
Not only will they recover the fastest, but longer term they’ll continue to grow – war or not.
Q – Should I buy gold?
Gold is no longer an optional investment.
The temptation to run out and buy more is extreme but probably a bad move unless you’re into pyrrhic victories. I think gold will probably move higher but not as much as you would think based on how it’s traded in the past. Today’s gold markets are highly leveraged and equally collateralized. Further, much of the speculation that used to impact gold prices has moved into Bitcoin and pot stocks.
Most investors will never make the connection and those who pile in are going to get caught by the near instantaneous whoosh on the other side as prices drop with no warning.
Besides, not to ruin your day, but if gold goes to $5,000/oz. odds are you’re going to have a lot of other things to worry about, the least of which will be stocks. If you want to stock up on anything, I submit that bullets, medicine, and diapers are the better bet.
Stick with what works.
Studies show that you want $1 for every $10 in bonds invested in gold as a means of dampening overall volatility. Or, if that much math isn’t appealing, you can achieve meaningful asset protection by having between 2%-5% of overall investable assets in the shiny stuff.
Q – Is there a way to profit?
I’ve got to admit, I smiled when I got this question from a number of Total Wealth Family Members wondering the same thing. You’ve taken the Total Wealth Mantra “from chaos comes opportunity” to heart and are looking further down the road (as you should).
There are two immediate plays to think about.
First, hedge your existing portfolio with a choice like the Ryder Inverse S&P 500 Inverse Fund (RYURX) or its ETF cousin, the ProShares Short S&P 500 (SH). The ratio of your hedge obviously depends on your personal circumstances, objectives, and risk tolerance. That means I can’t simply give you a blanket number or percentage of your portfolio to allocate. But, I can give you something to think about.
Hedging, by its very definition, means you’re engaging in protective behavior, which – as I use the word – means you are not looking to sell everything. Rather, you’re looking to put specific tools like the inverse funds to work as a means of staying in the game longer term.
Assuming that’s true, consider allocating the same percentage of money in your portfolio to the overall portfolio yield you have from stocks. That way the value of those investments is protected, as is the cash flow you derive from them. It won’t be perfect, but close enough under the circumstances.
Second, if you’re a speculator or simply want to profit from what could be a once in a lifetime event we all hope never to see, consider buying “at the money” put options on the S&P 500, the Dow or even the Nasdaq and spread out over the next 90 – 120 days. In other words, buy a few with September expiration dates, a few with October expiration dates and a few with December expiration dates.
Plan on losing every penny you spend on these options if war doesn’t come (and be thankful you did). That way you won’t have to second guess the markets even if Kim Jung Un is second guessing just about everything and everybody else.
In closing, the prospect of thermonuclear war is daunting, terrifying, and nightmarish all at once. But that doesn’t mean you have to give up hope.
We will get through whatever happens next together.
And, my goal is, profitably.
Thank you for being part of the Total Wealth Family, and for placing your trust in me.
Until next time,
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