The investor’s guide to geopolitics

Can you make money from geography? What about politics? How do demographics affect financial markets?

This guide will show you how geopolitics create investment trends and profit opportunities. They’re predictable, convenient to invest in and far more interesting than any other type of investing.

The only downside is that you usually have to have a little patience for things to play out. As with all types of investing, the outcome is never certain. But let’s take a look at some examples from the past where geopolitical trends created profitable investments. And some future opportunities this style of investing offers now.

1. Policy profiteering – how to profit from politics

Most people are so busy arguing about politics they miss the opportunity to profit from it. Political trends and the results of political policies are predictable. And it’s often easy to invest in the assets that benefit. I call this policy profiteering.

For example, modern central bankers are charged by law to use interest rates to manipulate the economy. Interest rates affect mortgages first and foremost. So it’s entirely predictable that we have housing booms when interest rates are unnaturally low (2002-2006) and housing busts when interest rates go up (2007).

Zoning laws add on to this effect. They restrict the supply of property from adjusting to the higher prices. It’s just like the coal and electricity shortages we had when the government controlled the price of those resources.

The legalisation of cannabis is another prime example you can profit from today. When the US government ended prohibition of alcohol, it created an enormous investment opportunity. Today, the same is happening in cannabis. Are you aligned to profit?

2.Brexit and the end of the EU

Brexit was a wonderful investment opportunity. The fall of the pound meant the FTSE 100 would surge because many of its companies earn their money overseas. As Brexit begins to take shape, optimism for Britain will see the pound rebound and companies with imports will benefit. But the FTSE 100 overall is less likely to gain.

Brexit is just the beginning of the end of the EU. Euroscepticism is on a steady march inside Europe. If Brexit is a success, the decision to leave the EU becomes undeniably realistic for other countries too. For now, it’s still considered extremist in places like France and the Netherlands.

If the EU falls apart, stronger countries like Germany are set to benefit while weaker countries lose their economic backers. The tumult in the meantime is your opportunity to invest.

Perhaps the most important geopolitical opportunity within the EU is that the eurozone shares a single monetary policy. If you think about it, the idea that Greece, Germany and Ireland should have the same interest rate is absurd. Since the inclusion of the euro, they’ve all faced completely different economic prospects at any given time. But the political necessity of the euro’s rates means it’s a one-size-fits-all monetary policy.

The result is an investable trend. Countries doing well will experience an unnatural boom thanks to low rates, while countries doing badly won’t get the monetary accommodation they need. In the lead up to the financial crisis, Germany was the laggard burdened with high rates while Ireland and Greece boomed without the increase in interest rates that would’ve kept them in check. Now the worm has turned and Germany is experiencing a property boom. (My inheritance is growing nicely as a result.)

3.Demographics of boom and doom

Demographics are my favourite geopolitical issue to profit from. The argument is very simple. The supply and demand for investment assets is primarily determined by the number of people buying and selling. And age is the biggest factor in that calculation.

It’s called the life-cycle hypothesis. In their 30s, people buy property and then go on to invest in the stock and bond market. In their retirement, say after 60, people begin to sell property and their investments to pay for retirement. So you can determine a good proportion of the supply and demand for investments in a reliable way. Just look at the demographics.

Japan is the textbook example of all this. The demographic analysis above would’ve sounded the alarm for Japan in the 1990s, just when its investment markets peaked. How about now? The number of working-age people in China is declining while the number of old is exploding. That’s why the Chinese stockmarket is lagging in the face of decent economic growth.

In Europe it’s much the same. Eastern Europe is in for a particularly bad shock. But where can you be optimistic about? US demographics are reasonable. But it’s Southeast Asia that’s expanding fast. Investing in exchange-traded funds (ETFs) from Indonesia, Philippines and Vietnam are great opportunities if you believe demographics are destiny.

4.Peak oil, oil shocks and Opec

Oil has been a geopolitical drama story for a long time. Major oil-producing nations are some of the least stable. Many believe US foreign policy is driven by the need for oil. And oil price shocks can bring economies to a standstill. Not to mention triggering huge inflation.

But how do you profit? Most of the oil market’s rumblings are well known. And that means they’re priced in. Where do you have an edge? By calling Opec’s big bluff. According to some insiders and WikiLeaks revelations, Opec countries don’t have half the oil they claim they do. And that means a bonanza for companies with proven reserves if word ever gets out. I lay it all out here.

5.Free-markets boom, collectivism dooms

Perhaps the easiest political trend to grasp and invest in is a simple proposition. Free markets allow countries to grow, while collectivism in any form prevents growth. It doesn’t matter whether it’s communism, socialism, nationalism, fascism or corporatism. Allowing people freedoms delivers the goods, literally and figuratively.

The examples are endless. East and West Germany, North and South Korea, the Soviet Union and Western Europe, China and Taiwan, Singapore and Malaysia. Each and every time we’ve had similar nations take a different road between free markets and collectivism, you get the same result.

The best example is in fact the early Puritan settlement of America. Until they abandoned their extreme form of communism, the settlers starved and relied on the kindness of the Native Americans. The story of Thanksgiving should be about what happened next – when capitalism came to America.

But a word of caution. It doesn’t matter so much how free market a country is. It’s the direction of reform that’s the key. And how far it can go. Take for example China’s boom of the past few decades. It’s still a nominally communist country. But that changed dramatically since Deng Xiaoping uttered “to get rich is glorious”. Meanwhile, the supposedly capitalist US is becoming more and more collectivist.

Brexit will hopefully mean that the UK breaks free from the EU’s collectivism and experiences a surprising economic boom.

6.Bitcoin – a unique geopolitical profit opportunity

You don’t need to understand the cryptocurrency bitcoin to notice something special about it. It’s a barometer of geopolitical strife. Whenever there’s a crisis, the price of bitcoin spikes. China’s capital controls, Venezuela’s toilet paper and food shortage, Iran’s sanctions and WikiLeaks revelations all move the bitcoin price. That’s because bitcoin is the ultimate antidote to government control. And its price is determined by the demand for the government-evading currency.

Each time a government tries to crack down on its citizens and their financial dealings, bitcoin becomes a more and more popular solution. And so the price goes up as they buy in.

If you want to make a bet on geopolitical problems in the long term, buying and holding bitcoin is a great option. Gold used to be the way to go for the same bet, but it can be confiscated by governments and the gold price is heavily manipulated by banks. You can learn more about bitcoin here.

These are just some of the ways to profit from geopolitics in the world. The formula is always the same. Identify a change happening in the world and figure out how it will move investment markets. It’s very different to the usual way of investing, but far more interesting and potentially far more rewarding.



Category: Geopolitics

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