Profiting from the War Profiteers

As we draw the curtain on another week, you’d be forgiven for thinking the world was inching closer to nuclear war.

North Korea’s latest show of force ultimately proved something of a damp squib. Nevertheless, the rogue state’s botched missile test raised new concerns about the potential for conflict in the Asia Pacific.

With nuclear experimentation intensifying on the Korean peninsula, how close are we to mutually assured destruction?

This week’s Markets & Money Weekend won’t attempt to answer this question. But we will let you in on a profit-making opportunity arising as the drums of war beat louder.

Our story continues below…

Understanding North Korea’s behaviour is impossible without first considering the relationship between China and the US.

North Korea adjoins China’s north-eastern border. It acts as a functional defensive barrier between mainland China and pro-US South Korea.

This helps explain why China tolerates North Korea’s seemingly erratic behaviour. But in reality, Pyongyang is anything but unpredictable. Like his father before him, Chairman Kim Jong-un uses the threat of nuclear war as a means to win concessions from both the US and China.

Though this has made North Korea an international pariah, Pyongyang has used this strategy with a great deal of success.

In addition, North Korea plays an understated role in the region’s stability. Because of its strong anti-Western stance, North Korea’s statehood allows Beijing to feel less wary of outside threats.

Granted, both the US and China would prefer a denuclearised Korean peninsula. Yet while the US favours a unified Korea, China must ensure North Korea’s survival.

A pro-Western, unified Korea would allow the US to station troops on China’s border. A key plank of Beijing’s foreign policy is to prevent that from happening. And no amount of North Korean nuclear weapons testing and international censure will change that.

To realise how seriously China regards this matter, consider that it lost 180,000 soldiers to protect this buffer during the Korean War. Ever since, the US has played a major role in facilitating South Korea’s rise as an industrial powerhouse. And it’s done this for few other reasons than to ring-fence China.

China, meanwhile, hasn’t been required to do anything of the sort in North Korea. In fact, an internationally-exiled recluse is exactly the kind of state China wants as a buffer.

Nonetheless, potential US encroachment on the peninsula presents an existential crisis for China. For this reason, Beijing gives North Korea plenty of leeway in how it conducts its business.

Despite this marriage of convenience, Pyongyang regularly takes advantage of its relationship with its bigger neighbour. North Korea raises China’s ire any time it tests nuclear weapons, as it gives the US an excuse to boost military presence in the region.

South Korea’s decision this week to move ahead with the deployment of a US missile defence system is only the latest example of this. The defence system will allow the US to further undermine China’s national security interests.

Unfortunately, none of this bodes well for both short and long term peace in the region. And while a hot war between the US and China is unthinkable, we can’t rule out a conflict by proxy.

China doesn’t want war. But it senses which way the wind is blowing. US military build-up in the region is on the rise. And while this doesn’t guarantee a full-blown conflict, the arms race is well and truly on.

The war profiteers

With or without war, militaries, and the companies producing equipment for them, stand to win from an arms race in East Asia.

In search for any small advantage on the battlefield, military spending has a habit of advancing society in unexpected ways. It doesn’t just come up with bigger and better guns. It leads to ground-breaking innovations, such as the radar system and the internet. Both were outcomes of technologies initially designed for military use.

Not content to merely improve battlefield equipment, militaries are also leading the charge in powering armies.

Military spending on new energy sources is rising rapidly. Right now, there is a race to maximise the potential of lithium. Militaries the world over see it as the cutting edge that could make the difference between victory and defeat. This kind of spending on research and development should lead to significant improvements in lithium-ion battery technology.

With the arms race heating up, you’re staring at a unique opportunity to ‘profit from the war profiteers’ by investing in lithium stocks today. To find out how you can take advantage of the companies shaping the future of warfare, go here.

This week in Markets & Money

In Tuesday’s Markets & Money, Jason revealed the real reason for the recent surge in cobalt prices. Despite the mainstream continuing to focus on the battery story, the civil unrest in the Democratic Republic of Congo is the true culprit for the price rise.

Yet, when the storm calms in the DRC, cobalt prices are likely to be in a world of pain, according to Jason. And cobalt stocks won’t be far behind, either.

That’s why Jason believes there are better plays out there at the moment. In fact, he’s excited about a metal that Goldman Sachs has called the fuel of the 21st century. Click here to find out what it is.

On Wednesday, Jason switched his attention to crude oil, asking whether it still represented a good investment.

OPEC would have you think it is. That’s despite the cartel producing more crude oil than it did when prices were in freefall two years ago. And the fact that oil supply continues to outweigh demand.

And yet oil experts still seem bullish on the price going forward.

The mainstream has bought into the story that OPEC will meet its production cuts. Yet everything points to a glut of oil flooding the market. Oil producers are racing to drill as much as they can while prices remain high. But that’s only going to lead to an inevitable glut in the future. Just last week, production in the Gulf of Mexico hit a record high.

All told, it’s shaping up to be 2014–15 all over again. For more on this story, click here.

Here in Australia, it appears that Japanese tourism is on the rise. As Callum noted on Thursday, tourist numbers from Japan to Australia were up 24% last year. But it’s not just tourists that are spending money in Australia.

With the interest rates in Japan at zero, the nation’s largest fund is changing its allocation mix. It controls some US$ 1 trillion in assets. And now it’s shifting that capital out of bonds and further into stocks.

With the Aussie stock market yielding 4%, some of this money should find its way here. For more on this story, click here.

On Friday, Vern presented his solution to the housing affordability crisis. His fix? Increase interest rates and leave the rest to the market.

Prior to 1990, Australian household debt hovered at 40% of GDP. Back then, interest rates were over 15%. Since then, rates have plummeted, and debt levels have ballooned to 120% of GDP. The correlation is clear. As Vern says, you can afford to borrow more money when rates are low.

Now we just need to send them back up, and let the housing affordability crisis fix itself. For the full story, go here.

Until next week,

Mat Spasic,
For Markets & Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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