Many analysts say that an attack on North Korea is out of the question. They think even Iran will now get away with its nuclear efforts.
Their theory: There would be too many repercussions, and the U.S. is already spread too thin in Afghanistan and Iraq.
I don’t buy it. All along, these same analysts have been mistakenly saying that neither Iran nor North Korea was a problem.
On the other hand, I started warning you of these looming problems over a year ago. Indeed, in my “Cycles of War†issue back on February 9, 2006, I wrote …
“Brace yourself … World events are building up toward a peak in the cycle of war — a combination of forces that could drive financial markets until the end of this decade.â€
Unfortunately, that’s proven to be true so far. And now that North Korea has tested a nuclear warhead, I think we’re entering the next phase of these crises.
Military confrontation is becoming almost inevitable, so it’s more important than ever that you understand how these events might develop, and what you must do to prepare your finances.
I’ll give you my take on some of your investment options in a moment. First, let’s talk about how military strikes against North Korea might unfold …
The U.S. Will Not
Want to Go It Alone
In my opinion, the U.S. would partner up with China, South Korea, and Japan to go up against North Korea.
Reason: All three of those countries are in immediate danger from North Korea. They are well within striking distance of North Korea’s estimated six to nine existing nuclear bombs, not to mention the country’s 11,000 cruise missiles and 1.2 million troops.
If I were living in South Korea or northern China right now, I’d be shaking in my boots. The crisis with North Korea could get ugly. Kim Jong Il is on a self-destructive path, and would just as soon see North Korea destroyed than kowtow to the West.
Kim Jong Il has nothing to lose. An estimated 55% of the population in North Korea is starving from a decade-long famine, not to mention a host of other problems. More than three million souls have already starved to death in the last five years.
Either Kim Jong Il provokes the world in the vain attempt to get concessions from the West, or a few years from now he’ll be overthrown by his own people. He’s making his moves now, viewing the West as weak.
But the dictator has underestimated his neighbors and the West. My view: We could see the U.S. lead attacks against North Korea’s nuclear facilities, possibly within the next three months.
However, because it’s not in immediate danger, the U.S will not be able to take charge until North Korea makes another direct move against a neighboring country.
Plus, the U.S. has only one aircraft carrier that could be deployed in less than a week’s time – the USS Kitty Hawk in port at the Yokosuka Naval Base, Japan.
Cruise missiles that can reach North Korea are readily available, but I doubt they’d be employed without the support of a strong naval presence.
The U.S. will have to be in a position to defend its 30,000 troops already stationed in South Korea, along with South Korean, Japanese and Chinese citizens. I figure at least three more aircraft carriers will have to be deployed, along with countless nuclear submarines and other supporting military hardware.
Matters are further complicated by another issue …
The Iran Situation Can
Also Heat Up Quickly
The UN Security Council has already authorized additional economic sanctions. But Kim Jong Il’s moves will only embolden Iranian President Ahmadinejad. After all, Kim Jong Il sells scuds and uranium to Iran.
Do you think Ahmadinejad is going to back down now? Heck no. He’s sitting in the driver’s seat in the Middle East.
There’s no way Bush will let that last very long. There’s way too much at stake. Iran wants control of the Middle East … they want Israel destroyed … they want Iraq … and they want to control the region’s oil.
A U.S. attack against Iran would, however, take a different course than an attack against North Korea. As I’ve told you before, Israel will probably take the lead. That will give Washington the saving face, at least on the surface, of not being the aggressor.
Sound far-fetched? It’s not. The recent Israeli/Hezbollah conflict was the opening act. In short, the next incident between Israel and Lebanon will likely lead to direct conflict with the country financing Hezbollah – Iran.
One last thing: I doubt attacks on Iran and North Korea would occur at the same time. In fact, because North Korea is the more pressing problem, I would be surprised by an attack on Iran before the first quarter of 2007. Still …
Now Is the Time
To Start Preparing!
The effects of these events on the markets won’t be pretty – you’ll need to be holding the right positions, and on the right side of the markets. Here are my thoughts …
Stocks: As strong as they may seem right now, with record highs in the Dow Jones Industrials, the broad stock market averages will likely fall hard when the first shots are fired. Even right now, I don’t think the market’s as strong as everyone thinks.
For one thing, the recent new highs in the Dow are not supported by the majority of stocks. For the past month, the number of New York Stock Exchange-listed stocks rising compared to those declining has been trending lower. That means the rally in the Dow Industrials is narrow in breadth, increasing the likelihood of a later decline.
Also, the overall trading volume has also been very light, as much as 20% behind the seasonal average. That indicates weakness, not strength.
Last, corporate earnings seem to have peaked during the second quarter. Third-quarter retail sales and durable goods orders have both been pointing down. So the earnings outlook does not support the new highs in the Dow.
Bottom line: I continue to like natural resources stocks like gold, oil, gas, and food … certain foreign stocks in countries that continue to do well, such as China … and key defense-related companies. But in general, I would use the Dow’s current strength to lighten up on, or even get completely out of, most other stocks.
Bonds: I don’t like them. Although a case can be made that U.S. Treasuries would rise in value as a safe haven play due to military conflict, I think there are much better ways to keep your money safe.
When it comes to bonds, I’d stick with short-term, U.S. Treasury bills or the equivalent money market funds for the majority of your cash.
Natural Resources: For the portion of your funds earmarked for more aggressive investments, this is still the place to be.
In times of war, they typically do great. Demand escalates … supplies tighten further … and overall prices rise. Add in the fact that central banks need to finance war and military defense by printing money, and you get a recipe for strong gains.
Gold mining shares, oil and gas companies, alternative energy, agricultural and food companies, and more should continue to do well in the weeks and months ahead. There will always be pullbacks, mind you, but the natural resource boom is far from over.
For specific recommendations, look into my Real Wealth Report. For just $99 a year, you get 12 monthly issues … all flash alerts … and full 24/7 website access. I think it will be the best $99 you ever spent.
Best wishes,
Larry
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