The investment power of politically incorrect

That escalated quickly.

2017 was marked with extraordinary low volatility for the US stockmarket. But so far, 2018 is shaping up to be the opposite. Instead of record amounts of days without a move greater than 1% in either direction, we have constant moves of more than 1% in both directions.

European markets can’t keep up with their bipolar US cousins. By the time the UK market is open, US futures are swinging back the other way already, leaving the UK market less volatile in the end. UK traders must feel like they’re in a stationary punching bag while Americans are on a rollercoaster.

Thanks to the February plunge, US markets haven’t seen new highs for 48 trading days. That’s the third longest streak since 2013.

High volatility and the makings of a bear market in the US are not a good sign for British stocks.

But let’s look at something entirely different today.

The best investment strategy of 2018

Policy profiteering has never been more promising.

The basic premise of this investment style is that the unintended consequences of government policy are predictable, and therefore tradeable.

Now, government policy fails in all sorts of creative ways. Sometimes it just doesn’t work and has to be abandoned. Sometimes the disastrous side-effects are worth investing in. And sometimes government policy signals you should opt out of the game and wait for a crash.

Here in the UK, the obvious example is greenbelts. They restrict the supply of housing, creating a house price boom that policy profiteers would invest in. Now that houses are unaffordable, those greenbelts are coming under attack from Tories looking to buy young votes with cheaper housing. But if they legalise a house construction boom, you’ll get falling house prices. Policy profiteers are forewarned.

Prohibition in the US is the classic case of a policy profiteering opportunity. Banning alcohol was never going to work in the first place, and it would eventually be abandoned. Investing in alcohol producers in Canada and Mexico was a good bet as prohibition came in. Americans popped across the border to drink. There was a drinks business boom.

Investing in drinks companies poised to take advantage of the end of prohibition would’ve been even better. As the law was laid to rest, anyone positioned to sell alcohol quickly in the US would’ve made a killing.

Many decades later, the same story is playing out with marijuana. Canadian pot growers are exporting vast amounts of their crop. It’s easy to invest in the boom. As my friend Eoin Treacy explains, “Ultimately, this opportunity could be bigger than investing in Anheuser-Busch in 1932 or bitcoin in 2011.” To find out which stocks are set for the biggest gains, check out Eoin’s report.

Bitcoin is another good example of policy profiteering. The boom took off when people in countries with government crackdowns realised how they could use the cryptocurrency to evade those crackdowns. Venezuela, China and Zimbabwe’s governments practically created the bitcoin boom with their financial rules.

The CEO of the company that owns the New York Stock Exchange told Bloomberg that the credibility of cryptocurrencies already exceeds that of the US government.

“People put more faith in a guy named Satoshi Nakamoto that no one has ever met than they do in the U.S. Fed.” And “People are more comfortable in technology than the institutions of government and society that I grew up with.”

Imagine what’ll happen to the bitcoin price during a financial crisis, when governments around the world impose draconian laws on how you can move and spend your money for your own good. Or if the trade war escalates and the same rules come into effect for “patriotic” reasons.

I think I know the answer. And here’s what I’m reading to get prepared for the coming cryptocurrency boom.

But my favourite policy profiteering opportunity right now is one so politically incorrect I hesitate to mention it. In fact, I can’t see anyone suggesting it.

Buy Russian stocks

Everything Russian is politically incorrect at the moment. And anything politically incorrect is Russian too.

If Bashar al-Assad is accused of using chemical weapons, the Russians get the blame. If chemical weapons are used in Salisbury, the Russians get the blame. If Donald Trump gets elected, the Russians get the blame. Russia is behind fake news and controls ads on Facebook. The Catalonians voted for independence because of the Russians. Hillary Clinton’s dodgy practices were exposed by Russia too. Brexiteers are Russia lovers. Italy’s Northern League is Russian backed. Wikileaks’ revelations come from Russia too.

The Russian hysteria has delivered another good example of policy profiteering that I should’ve seen coming. The sanctions on Russian companies are creating disruptions in markets where Russians play a big role.

The London Metals Exchange (LME) placed a temporary conditional suspension on metal from Russia’s Rusal after the US Treasury announced new sanctions on Friday.

The owners of the metal have to prove the stuff was sourced in compliance with US sanctions if they want to participate at the LME with it. As with a great deal of recent rules in the UK, it’s a case of guilty until proven innocent.

The only problem is, Rusal is responsible for about 7% of global aluminium production. And so the aluminium price jumped 7% on Monday. Combined with the 10% tariff on US imports of so-called aluminum, that was enough to make Alcoa’s share price surge 7% and Century Aluminium shares to surge 13%. Policy profiteers made a killing.

Policy profiteering suggests that the governments’ Russian hysteria will backfire eventually. Already the UK government’s handling of the Skripal case is under fire from all sorts of corners.

If you agree with me that all this Russian hysteria is set to fail, just as all government policies do, then buying Russian stocks is the logical conclusion. The question is whether now is the time to buy Russian stocks.

The ruble crashed about 8% since the latest round of US sanctions this month. The Russian government had to cancel a bond auction too.

They say you should wait for blood in the streets. Well, Russia’s military is on high alert for a US military strike in Syria. And that just days after the experienced warmonger John Bolton arrived on the job as national security adviser. President Trump cancelled a trip to South America to oversee the Syrian response.

The time for Russian stocks is drawing near.

Politically incorrect killing

The Russian hysteria in general has me very confused. And so does the obsession with chemical weapons. It seems that the mere mention of chemical weapons justifies pretty much anything.

I’d love to know why chemical weapons are so heinous. When the US bombs and kills thousands of civilians in Iraq, Afghanistan, Syria and other places, it is an unfortunate mistake. When someone releases gas, it’s a prelude to war for countries not even involved.

What makes this especially odd is that foreign governments only seem to actually use chemical weapons when it disadvantages them most.

As soon as Obama declared that chemical weapons were a “red line” that would trigger the US’ involvement in Syria, they were used in Syria. As soon as Trump declared his intention to leave Syria, they were used again.

As Russia’s World Cup draws near and threatens to give the country a touch of good PR, the Russians use chemical weapons too. Without even killing their targets. And with a traceable substance that supposedly could only have been made and used by them…

It’s all very odd. Unless someone is using the very novel and untried idea of misdirection. But governments and their spy agencies would never think of that. Especially when it comes to poisoning a double agent on foreign soil.

I can’t help pointing out that the Russian parliament is called the Duma and the Syrian city that was attacked with gas is phonetically translated to Dūmā…

Anyway, when the Russian hysteria finally ends, brave investors will be rewarded.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Geopolitics

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