New Drums of War

New drums of war are everywhere and beating louder by the day.

If you don’t get their message — or you underestimate their importance — it’s about time that you pay closer attention:

Global conflict is a powerful force that could drive key investments up –or down — and continue doing so for years to come. Very few analysts understand it. But you can. And if you do, it could make the difference between major investment disappointments and major successes.

The story begins 25 years ago, in 1989.

That was the pivotal year for the most dramatic peaceful transformation of modern history …

The democratic revolutions in Poland, Hungary, East Germany, Bulgaria, Czechoslovakia and Romania in the Autumn of 1989 …

The fall of the Berlin Wall on November 9th of that year …

The collapse of the Soviet Union in December …

The rapid, lightning-like integration of Europe …

The enormous capital flows from West to East in the 1990s, and  ultimately …

The inclusion of Russia in the grand old club of advanced, democratic nations, the G8.

Meanwhile, in Asia, we saw a parallel transformation, albeit mostly in the economic sphere: China literally leaped into the global market economy. Vietnam followed. Trade with the West and their capitalist neighbors doubled, tripled and then doubled again.

As pointed out by the OECD and prominent analysts at the time, the transition to market-based economies created massive opportunities for investors. We saw a huge increase in cross-border trade and foreign direct investment. Almost simultaneously, the emergence of the digital revolution brought a decrease in international transaction costs. The Asian tigers and the BRIC countries — Brazil, Russia, India, and China — grew exponentially. We saw a surge in cross-border mergers and acquisitions.

In this environment, the mere thought of regional conflict seemed absurd. And anyone talking about global conflict would inevitably be invited to check in to the nearest insane asylum.

And yet, it was just about ten years ago, at the peak of this grand peace cycle, that Larry Edelson, our precious metals analyst sent me a manuscript warning of precisely the opposite.

His main point: There are a myriad of territorial disputes around the world that are potentially very dangerous — between China and Japan … between China and its Southeast Asian neighbors … between Russia and former Soviet republics … between Russia and East European countries … and many more.

His conclusion: Each of these will be major global hotspots someday. And some could emerge as the focal points of a future cold war — or worse.

The report was fascinating. I studied it carefully. I looked up each of the disputed territories on the map. And then … I promptly forgot about the whole thing.

Why? Because the conclusions simply did not jive with the prevailing reality. Larry was the only person I knew who thought any of this stuff was even vaguely important. I didn’t.

But now look! Just in the last few months, it seems as though the entire basis for the peaceful transformation of the last quarter century is beginning to disintegrate.

Russia has been kicked out of the G8 (now G7). And in Russia today, anti-American propaganda in the media is so efficient, so extreme and so widespread, it makes the Soviet-era propaganda machine seem primitive by comparison.

The New York Times, reporting from Moscow, explains it this way:

“From the moment that Russia’s invasion and annexation of Crimea cast a new, bitter chill over relations with the West, a sinister jingoistic vibe has pervaded this unsettled capital — stirred up by state-controlled television and Mr. Putin himself.

“In the weeks since the military incursion into Crimea, Russian flags have been hung from the windows of apartment buildings all over the city, just as American flags appeared in profusion after the Sept. 11 terror attacks.

“There is a new website with a name that translates as ‘traitor.net’ that includes photos and quotations of public figures who have spoken out in some way against Russia’s policy toward Ukraine. The bottom of the site has a button inviting viewers to ‘suggest a traitor.’

“At Mr. Putin’s direction, a committee led by his chief of staff is developing a new ‘state policy in culture.’ Widely expected to be enacted into law, the proposed cultural policy emphasizes that ‘Russia is not Europe’ and urges ‘a rejection of the principles of multiculturalism and tolerance’ in favor of emphasizing Russia’s ‘unique state-government civilization.'”

A Russian news site, znak.com, has also reported that a popular series of math textbooks will be dropped from an official list of recommended educational texts because it uses too many non-Russian fairy-tale characters in its illustrations.

In a recent travel advisory, the Russian Foreign Ministry warned its citizens not to travel to countries that have extradition treaties with the United States, saying that the Obama administration “is trying to make a routine practice out of hunting for Russian citizens in third countries with the goal of their subsequent extradition and conviction in the U.S. on the basis of, as a rule, questionable charges.”

And all this is supported by a massive, government-directed network of social media specialists, who not only are said to distort the facts, but are also considered very adept at creating facts based on false reporting from fictional “eyewitness bloggers.”

In this sense, the media machine is said to be far more advanced and efficient than anything used in Soviet Russia.

This is not to say that all Russians believe everything they read or hear. But minority opinions in Russia are now far more difficult to communicate, even more difficult to prove, and often downright dangerous for the individual.

In China, anti-American commentary is not the bigger issue — yet. It’s the massive anti-Japanese propaganda machine.

Last November, China surprised the world by declaring an Air Defense Identification Zone covering most of the East China Sea, including the airspace above the hotly disputed Senkaku Islands administered by Japan (called the Diaoyu Islands in China).

For Americans, this is a distant annoyance at most. But for Japanese citizens, it was a shock of immeasurable dimensions.

Meanwhile, Japan’s government hasn’t hesitated to give Japan-bashing bloggers material to write about:

Just last month, for example, Japanese Prime Minister Shinzo Abe visited the Yasukuni Shrine in Tokyo, implicitly honoring World War II generals who were executed for war crimes in China and Korea — a not-so-subtle offense that sent waves of anger up the spines of Chinese citizens.

And just this week, nearly seven decades after the end of World War II, Abe is getting ready to officially call for an end to long-standing restrictions on Japan’s military, another major shot across the bow of China.

Think this is just chest-pounding and saber-rattling? Well, that’s what many people thought about recent events in Ukraine as well. But now look!

I’ve personally been to China three times recently. I talked to people of all ages and walks of life. And as a way of gauging their sentiment, I told almost everyone that I used to live in Japan, or that my son lives there today.

Invariably, the reactions were negative. “How can he do such a thing? Doesn’t he know the truth about them?” Even a 6-year old told me she “knows” Japanese people are “evil.”

Meanwhile, anti-Chinese sentiment in Japan is equally unanimous, with over 93% expressing negative opinions in a recent pole. Hordes of Japanese tourists have cancelled travel plans to China. Even worldly Japanese citizens with Chinese friends in Mainland China are loath to travel there.

All this is very serious. It has the earmarks of at least two massive regional conflicts — one in Europe, one in Asia.

The big question: What impact will it have on stocks, ETFs, gold, silver, energy and commodities?

Larry is getting ready to provide the answers, many of which are likely to surprise you. So don’t miss them.

As I said at the outset, a better understanding of these trends could make the difference between your investment failure or success.

Good luck and God bless!

Martin

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