Dear Investor,
Martin here with an update on wars.
When our friend Larry Edelson first predicted a rising cycle of war, I didn’t believe him.
The Cold War was just ending.
The big thing on Wall Street was the so-called “peace dividend” …
And this cute picture we took of Larry’s daughter with my son contemplating the globe, symbolized the times.
So, Larry’s forecast seemed completely out of place.
But then he explained it.
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“I’m not just talking about conventional war,” he said. “That comes later. I’m talking about trade war, civil war, and even something called cyberwar.
“Nor am I predicting it right away,” Larry continued.
“Right now, we’re at an historic low in the war cycle. But that’s the problem. From this point forward, it can only ramp up — step by step, year by year.
“Then watch out!” he exclaimed. “Because my target for the peak war year is 2020.”
Where Are We Now?
Not in a very good place.
Civil wars rage in Syria, Africa and Southeast Asia. More are threatened by breakaway republics of Europe and elsewhere.
Cyberwars, cyberattacks, and cyberhacks are ongoing. Not just Russia’s meddling in the politics of foreign countries. But also attacks by North Korea and China. Not to mention thousands of private cyberguns for hire.
A Trump Trade War?
Trade wars, thought to be a relic of history, also seem to be on the verge of a big comeback.
In retaliation for President Trump’s promise last week to impose stiff tariffs on imported steel and aluminum, the European Union is threatening to slap tariffs on a whole series of U.S. products from Harley-Davidsons to Kentucky bourbon.
Brazil, Canada, Japan, South Korea and other major U.S. allies could soon follow with similar tariffs.
And those are just America’s allies.
China and Russia may not say much initially. But don’t let that fool you. The longer they wait, the more serious their reaction is likely to be.
What does that do to stocks?
Wall Street pundits are virtually unanimous in their verdict: It’s not good for the economy, profits, and investors. That’s why the market tumbled late last week.
I don’t always agree with Wall Street pundits. And sometimes I vehemently disagree.
But this is not one of those cases.
No matter how you slice and dice the data, it’s almost impossible to chart a roadmap that takes trade wars to a good place. Even if we “win.”
It’s like a barroom brawl that never ends. The cowboys punch and counterpunch all night long until they’re all sprawled out on the floor.
Not dead to the world. But almost.
One More Kind of War
You remember the last time the stock market plunged earlier this year. I know. How could anyone forget?
And I assume you also remember what triggered it: Falling bond prices and the fear of rising interest rates.
Well, a trade war, which is inflationary because it drives up import prices, isn’t going to exactly make that threat go away. It’s going to make it worse.
What’s more, while nations are already in the mood to throw bricks at each other, another weapon they could pull out from their arsenal is competitive interest rate hikes. A rate war!
Country A wants to attract scarce short-term foreign money. So, it hikes its lending rates.
Country B wants to keep that money within its borders or go after new money in global money markets. So, it hikes its lending rates even more.
Before you know it, interest rates are leapfrogging each other all over the globe.
How Wars Hit Stocks
There are a long list of stocks vulnerable to trade wars.
Ford Motor (F), which was already hurting due to earnings disappointments, is feeling the pain. And just this past Friday, General Motors (GM) traded at its lowest level since September.
But the victims are not just companies that consume of steel or aluminum. Any U.S.-based multinational that relies on exports could be in deep doodoo during an all-out trade war.
Plus, there’s an even longer list of companies vulnerable to interest-rate wars.
Shares of Homebuilders, REITs, and mortgage lenders are already sinking.
Lennar (LEN), for example, has just sunk from around $72 per share to the high 50s.
D.R. Horton (DHI) is down from $53 and change to about $42.
And these 20%-plus declines are just since the beginning of the year!
Next, don’t be surprised if big banks get slammed.
Good thing we’re sticking with companies that have our highest Weiss Ratings, typically more resilient in any market conditions.
Also, good thing we’re in lots of alternative investments that benefit from most of these trends. Like gold, silver, energy, energy metals, even cryptocurrencies.
Stay tuned.
Best,
Martin
