Protecting Your Assets in an Ever More Dangerous World

Protecting Your Assets in an Ever More Dangerous World
May

4

2017

Protecting Your Assets in an Ever More Dangerous World

Recent Global Events are Making the Unthinkable something to think about. Here is how to Prepare Now.

CNBC published an article by Ron Insana last month entitled “Bear markets are started by these two things, and the US could be headed for both of them“.

Insana argues that the odds of a new bear market in stocks are rising perilously fast, while investors remain either distracted or comfortably complacent. While Insana singles out rising interest rates as a core risk factor, his bigger concern is the quietly rising odds of war – and its effect on the US stock market.

Insana drives home a point that stock investors may want to consider: History shows that bear markets are often started by one of two things: Rising interest rates or the onset of war – and the US could be in for both. Insana’s primary concern seems to be with the second.


Bear markets, history shows, are often started by two things; rising interest rates and the onset of war. – Ron Insana, CNBC

You may tell yourself it can’t happen. Countries have evolved too much since World War II. A major war, a hot war, between two or more major players on the world stage can’t happen in this day and age, can it?

If you believe this way, you may want to think again. Insana and CNBC are not the only authors and media speculating over such possibilities as of late. The market is feeling it too. The Wall Street Journal reports that the CBOE Volatility Index jumped 24% in the week of April 7th -14th.

In fact, scenarios for such conflicts may not be so far-fetched at all.

Bracing for a Major Conflict?

The US missile strike in Syria is only one such possible trigger point for the beginning of a major conflict. Triggering a conflict with Russia and/or Iran through Syria is not an unthinkable scenario.

Yet as hot as that area is, the far east could heat up even more quickly with a series of potential conflict points.


…what happens if something like this goes down? And if it does, where do I want to be as an investor to protect my assets?

As I write this, Vladimir Putin calls US/Russian relations the “worst since the cold war.” US fighter escorts are intercepting Russian Bombers near Alaskan airspace. Chinese and Japanese fighters are busy in a quickly escalating game of cat and mouse over a disputed set of islands in the North China sea – all while Disputes remain in the South China sea over a set of artificial reefs China will use as air bases. North Korea remains a loose cannon with nukes and rapidly rising capability to deliver them. The USS Carl Vinson strike group is steaming towards the Korean Peninsula, reportedly soon to be joined by a Japanese naval force. Add to this, a president Trump, fresh off a successful missile launch in Syria, pledging (via tweet) to “solve” the North Korean problem with or without Chinese help.

Yeah.

I fancy myself a realist and try not to get too excited about speculative “what ifs.” I support my country and my president. But from where I’m standing, we’re one match strike away from an engagement (accidental or not) between two major military forces – an engagement that could spiral into much more. And we’re as close to it as I can ever remember in my lifetime.

What Happens – if it Happens?

The question we have to ask ourselves as investors then, is what happens if something like this goes down? And if it does, where do I want to be as an investor to protect my assets?

At the end of the day, it is impossible to tell how any market will react to such a “trigger” event. Yet if Insana is right, and history suggests he is, it will not be good for stocks.

Most likely, even a limited ground or air engagement between US and Russian forces over Syria or a minor US/Chinese naval engagement in the South China sea would roil markets.

A missile strike on North Korean nuclear targets would probably do a lot more than that.

This does not even take into consideration the longer term consequences of a protracted engagement – whatever that may look like in the 21st century.

The bigger picture, as is the name of this column, is this: The geopolitical environment in 2017 is MORE than ripe for a black swan type of event. If you’re not prepared when it happens, it will be just as Robert Plant once crowed – nobody’s fault but yours. There is writing all over the wall. You’ve been given plenty of time to prepare.

Preparing for the Unthinkable

Does this mean it’s time to cash out all the stocks, clear the 401K, convert everything to gold and bullets and head to the bomb shelter?

Let’s not get ahead of ourselves. We’re all rational people here. Lets hope it all works out. Life goes on. The world keeps turning. Its unlikely China or Russia has any more interest in a shooting war than does the US. That doesn’t mean you shouldn’t be prepared.

It does mean that it may be time to get covered up if you’re exposed. Have a lot of exposure to stocks or the S&P? Buying some S&P puts as “disaster insurance” is never a bad idea.

Are you shorting a lot of naked puts on indexes this year? Great! You should be having a strong year thus far. However, you might consider the slightly more conservative credit spreads for Q2-Q4.


This column is simply about being prepared for the unthinkable – but hopefully something that never happens.

Finally, for Pete’s sake get diversified. If stocks do take one on the chin, there are other markets that could benefit handsomely should such a conflict arise. (For a more in depth look at proper diversification, see Michael Gross’s Option Institute piece, starting on page 5).

The Big Diversifier

It is not my intention here to describe how one could profit from the horrors of war. Such an occurrence could hold catastrophic consequences for our country and potentially even ourselves or our families. But protecting your assets would become ever more important in such a scenario. This column is simply about being prepared for the unthinkable – but hopefully something that never happens.

One thing you can be certain is that even with fireworks in Syria, China, North Korea or even the shores of Los Angeles, people will still drink coffee in the morning. We’ll still need our cornflakes, our bread, our hamburgers and our orange juice. Our homes will still need heating and cooling. Our cars will still need gas. We will still need our commodities – in some cases, even more so.

Everyone still eats during wartime

Come war or bear markets: Whether a World War or just a downturn in stocks, people still drink coffee and eat corn flakes.


The prices of some of these products may rise in a wartime environment. Others may fall. But they will still be here. Options will still trade on them. Investors will still be able to pull premium from them – even if stocks collapse.

That’s a pretty big diversifier. And a pretty nice insurance policy.

Here is to peace, intelligence and reason. And having a great month of premium collection.

Regards,

James

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