The New Fear Trade

In today’s Money Morning…threats and childish insults on the international stage…investing in fear as the sabres rattle…a new way to trade fear…and more…

They’re at it again. The madmen and halfwits with their fingers on the nuclear triggers spent the early part of this week exchanging threats across the Pacific Ocean.

Gold has seen a better than 2% increase this week. The VIX (volatility index), a good proxy for fear in markets, rose above 15% for the first time since June.

It’s unlikely North Korea really has the capability to land a nuclear strike against the mainland United States. Australia may be in range of the newest missiles North Korea has recently tested. But we’re unlikely to be at the top of Kim’s hit-list.

For our allies in South Korea and Japan, Kim Jong-un’s threats are much more realistic. North Korea’s nuclear capabilities may be exaggerations or fiction. But it will be cold comfort for the residents of Seoul, if the artillery of the world’s largest conventional army comes down on their heads.

This is a nightmare scenario. But we’ve been brought to the brink of this particular nightmare many times before. Each time, the North Korean government eventually backs down. While being careful to portray itself, to its own people, as having done nothing of the sort.

Sometimes it wins some concessions in terms of trade, sanctions, or international travel and financial freedoms for members of its governing class. Other times, it doesn’t. As far as international markets are concerned, it’s all the same.

It’s been 64 years since the Korean War ground to a halt in a military and diplomatic stalemate. This awkward, unhappy compromise has stood, despite the North’s regular provocations. And despite several international incidents. Some of those incidents have been bloodier, and brought us much closer to the brink, than today’s war of words.

It would be wrong to assume that, just because things have gone a certain way for decades, they won’t ever change. But you can’t uproot your entire portfolio every time North Korea makes a new threat, or Trump tweets something ill-considered late at night.

Your own risk levels will depend on your own needs and circumstances. As well as your own belief about how real the potential threats to the market are. A war in the Pacific is an extreme outcome — unlikely, but potentially catastrophic if it does happen. If you’re hedging against the possibility — or even just trying to profit from the market’s reaction to the possibility — you have a few choices.

If you’re feeling courageous, you could try shorting the market, especially stocks exposed to international trade. That strategy can get very expensive very quickly if you’re wrong. Or even if you’re right, but too early.

Gold we’ve already mentioned. For centuries, gold has been the go-to when escaping economic chaos and government instability.

You could consider stocks that have the potential to profit from the worst possible outcome: War. Or even from the threat of war. Jason Stevenson of Resource Speculator has recommended several resource companies that could see massive gains if that sort of terrible outcome did happen. You can find out more about Resource Speculator here.

But the modern world throws up a fourth possibility: Cryptocurrencies.

Cryptocurrencies like bitcoin offer a form of ‘digital gold’. A place you can put your wealth, out of reach of governments and central banks. And in times of chaos and instability, cryptos should stand apart. Or even benefit, as investors flee fiat money.

2017 has seen ever-increasing attention on cryptocurrencies from the mainstream media. They can no longer ignore this new asset class. And now, as tensions rise in the Pacific, we may see the first major ‘bitcoin fear trade’.

While bitcoin and other cryptos may benefit from the fear trade, I think the ‘digital gold’ label is a mistake. Note that I don’t call crypto a ‘store of wealth’, like many do for gold.

That’s because nothing so volatile as cryptocurrencies have been could be considered a place to store your wealth away. So far, the extreme volatility is shaking out in favour of cryptos like bitcoin and ether. Both have seen incredible gains. As have many other cryptos that our resident cryptocurrency experts, Ryan and Sam, look at in Secret Crypto Network.

Sam and Ryan argue that, in the future, cryptocurrencies will be used mainly to buy and sell goods, like any currency. Not as an investment, or a store of wealth. But during these chaotic early years, we’re seeing incredible up and down moves in value. And the ‘fear trade’ could be a trigger for more of those incredible gains.

If the exchange of threats and insults between the US and North Korean leaders amounts to anything worse, some cryptos will likely explode upward. When it comes to knowing which, you need someone in your corner who understands cryptocurrency. To get someone like that on your side, click here.

This week in Money Morning

Monday’s Money Morning looked at three seemingly unconnected events, which could all be indicators of something larger. Could the Aussie resources market finally be staging a definitive turnaround? It may seem unlikely. But then again, the greatest investment gains are often made when most investors have given up on a sector. In fact, that’s one of the reasons to reconsider the resources sector. To read how, you can find Monday’s Money Morning here.

Cryptocurrencies, on the other hand, aren’t suffering from any lack of interest. In fact, there’s been a sharp rise in interest. And in the number of friends and family wanting to pick Ryan Dinse’s brain on the topic. As Ryan wrote on Tuesday, he’s been getting a lot of emails from people who used to have no time for cryptos.

That’s partially due to the mainstream media finally clueing in to what the likes of Sam Volkering and Ryan have been saying all along. That cryptocurrencies like bitcoin are here to stay. And the changes they’ve already made to global finance are just the tip of the iceberg. But is the sudden influx of crypto headlines a danger sign? If the masses are finally rushing to take part, is it too late to get in? Are we headed towards hysterical highs and an almighty crash?

Ryan argues that we aren’t at that stage of the boom yet. We’ll get there. But crypto is still too hard and too mysterious for most investors…which gives you an advantage. To find out why, click here.

As international tensions ratcheted upward, Ryan looked at the reasons why this could, surprisingly, be good for Australia.

If we don’t all die in nuclear fire, that is.

But, as discussed above, that outcome is very unlikely. And if it does happen, you won’t be worried about your investment portfolio anyway. So in the meantime, click here to read how increasing sanctions on North Korea could benefit Australia’s economy.

Thursday’s Money Morning looks at an object lesson from the Aussie stock market this week. A perfect example, which we can use to learn some crucial points about small-cap investing.

Of course, if you happen to own shares in the company, it may have been an expensive lesson. All the more reason to make sure you learn everything you can from it. And if you were fortunate enough not to be caught up in this sad story, then check out this Money Morning article to make sure you won’t be caught in the next one.

On Friday Ryan, looked at two trades that harness the primal emotions in the market: Fear and hope — or fear and greed, if you prefer.

You may not give much credence to North Korea’s continued sabre-rattling, but you can’t deny the effects it has had on markets this week. Especially when Trump seems so ready to take the bait. And Ryan has a trade in Friday’s Money Morning that typically profits from fear and instability. But if you’re convinced that it will all amount to little, as it has so often before, Ryan also has a trade for the flipside. You can check out both here.

However these tensions are resolved, we’ll be here next week to discuss how it’s driving markets. Until then, enjoy your weekend!


Tyler Jefferson,
Editor, Money Weekend

Tyler Jefferson joined Port Phillip Publishing in 2012. With a background in publishing, he started out as part of the team working behind the scenes with your Editors to bring you Money Morning each day.

When he joined, Tyler was Port Phillip Publishing’s 12th employee. Today that number has grown to over 50, as more and more readers turn to Money Morning as their source for independent financial analysis and ideas.

Today as Managing Editor, Tyler still edits the articles you read each day. Along with that, he occasionally contributes to Money Morning with his own irreverent take on the most interesting news and opportunities for you.

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