Iraq Burning! Volatility Spiking! What’s Next …

MARKET ROUNDUP  Dow: +41.55 to 16,775.74  S&P 500: +6.05 to 1,936.06  Nasdaq:  +13.02 to 4,310.653  10-YR Yield: +.009 to 2.605%  Gold: +.10 to 1,273.60  Crude Oil: +.28 to 106.81

Many investors “moved on” from worrying about Iraq a few years ago. But, boy, is that ever turning out to be a mistake! Events there are coming back into sharp focus with every new headline out of the troubled country.

Here is a country led by Shiite Muslims (who constitute about 60 percent of the nation’s population), but possessing a sizable Sunni population. You also have a semi-autonomous northern region made up largely of ethnic Kurds. The hope was that after spending hundreds of billions of dollars, and sacrificing thousands of American lives, Iraq would not only survive, but thrive as a new mutli-ethnic, democratic regime.

Yet here we are, with the militant ISIS group rampaging through town after town on a march to Baghdad. It has now captured Fallujah, Ramadi and Mosul, and is battling for control of Tikrit and other cities closer to the nation’s capital.

Here we are with the Kurds seizing the city of Kirkuk from fleeing Iraqi army units. That increases the risk politicians there will simply declare part of Iraq their own country entirely.

“I believe we’re going to see more violent moves in stocks, bonds, currencies and commodities in the back half of 2014 — something that opens up new profit opportunities, as well as create new risks.”

Here we are with Iran saying it will support its Shiite brethren in Iraq by sending in forces and sponsoring Shiite militias. Members of its Revolutionary Guard are reportedly already streaming into the country, further expanding its sphere of influence in the Middle East.

In other words, here we are staring abject failure in the face. It’s a travesty that speaks to the utter ineffectualness of American foreign policy, especially in light of the previous annexation of Crimea by Russian President Vladimir Putin.

Much more will be said about the geopolitical ramifications of this turmoil. But in this column, I want to talk about what it means for you and your wealth.

I told you yesterday that it should be yet another factor driving crude oil prices higher. But it could also help drive interest rates higher. That’s because higher energy prices will increase inflationary pressures at a time when central bankers are continuing to beat a retreat from excessively easy monetary policy.

Earlier this week, the central bank in New Zealand raised its benchmark short-term interest rate for the third time in a row to 3.25 percent. It’s the first developed-world bank to take that step … but it will not be the last!

Indeed, one of the most dovish policymakers around — Bank of England head Mark Carney — warned in a speech last night that he could raise interest rates sooner than expected. The reason? The U.K. economy is growing nicely, and the housing market there is swept up in a renewed bubble.

Companies that help transport all the oil and gas we’re finding in new locations to market are bound to prosper.

Here in the U.S., several Federal Reserve members have recently warned of extreme complacency and the risk of leaving rates too low for too long. I believe they’re “prepping the battlefield” for a further shift toward tighter money. In fact, there’s an off chance they taper QE more aggressively at their policy meeting next week, which concludes on Wednesday, June 18. They could go from a tapering pace of $10 billion per meeting to $15 billion or even a less-likely $20 billion.

Finally, the Iraq conflict is just one more reason why the extreme suppression of volatility in virtually all asset classes is likely coming to an end. I believe we’re going to see more violent moves in stocks, bonds, currencies and commodities in the back half of 2014 — something that opens up new profit opportunities, as well as create new risks.

So tighten up those stops, take some profits, avoid long-term bonds and stick with the kinds of stocks you’ll find in my Safe Money Report. My latest monthly issue was just released, and it contains important advice about what steps to take in this increasingly dangerous market. To get the details, just click here.

As for Iraq, how does the chaos there impact your investing strategy? What do you think about the failure of U.S. foreign policy there, in Russia and elsewhere? How can America salvage its massive investment in blood and money in Iraq? Let me know in the comments section below.

OUR READERS SPEAK

I’m still seeing some solid discussion of the corporate tax issue online, and that’s encouraging. This is a major issue for investors and American corporations, so the more knowledge that’s shared, the better.

Reader Steve J. makes a good point about the “hidden” cost of high corporate taxes. His comment: “What people don’t realize is that they are paying the corporate tax when they buy their products. It’s built into the price. Eliminate the tax and the price will go down.”

Meanwhile, Reader Vincent P. highlighted one of the risks of investing in the energy sector. He said the following: “In October of 2013, I invested in four oil drilling companies. Still waiting for returns on my investments … wonder how long will it take to receive returns?”

I think the trick is knowing where to invest within the broader energy sector. I’ve been focusing on companies that help transport all the oil and gas we’re finding in new locations to market, via rail, pipeline, truck or otherwise. One company I highlighted in Safe Money several months ago has already generated open gains of 80 percent or more, and I’m expecting more of those kinds of profits over the next couple of years thanks to the domestic energy boom.

If you have some of your own ideas, please share them below.

OTHER DEVELOPMENTS OF THE DAY

 The U.S. government is turning the screws on yet another bank. Citigroup (Weiss Ratings: C, A-) is reportedly in the line of fire this time, with the feds seeking more than $10 billion for practices related to the sale of crummy mortgage bonds.

JPMorgan Chase (Weiss Ratings: JPM, A), Bank of America (Weiss Ratings: BAC, A-), and other large financial institutions have already paid tens of billions of dollars for all kinds of things they did during the mortgage, housing, and credit market bubble.

 Despite all that, the credit market is “re-bubbling,” according to the Wall Street Journal. The newspaper reports that “junk”-rated companies are borrowing hundreds of billions of dollars in the bond market — with few protections for investors. So-called “covenant-lite” lending is exploding, and total highly leveraged lending volume is even higher than in 2006-07.

You probably don’t need me to tell you that was right before the last credit bubble started to implode. I’m sure this time, things will work out much better (cough … yeah right … cough!)

 Now this is a security that even a bond bear like me could sink my teeth into! Buy an 8 percent bond from British Mexican restaurant chain Chilango and you get a free burrito every week for the life of the debt. Yum!

Reminder: You can let me know what you think by putting your comments at the bottom.

Until next time,

Mike Larson