Before I get started, I want to make something clear. I don’t want war.
No sane person wants war.
Yet, whether we choose to admit it or not, we can almost feel that something’s brewing behind the scenes. In my view, another major war is near, and it will tear the world apart.
The ‘great unwashed’ aren’t happy, and the global elites are doing nothing about it.
Dissatisfied people are fighting back. In a few moves that have stunned the political world, the UK voted to the leave the European Union. The Austrian election was rigged, and will be re-run. Australia can’t form government; neither can Spain. And third party politics is rising globally.
The elite still think it’s a joke…
In the future, with government never balancing a budget, we’re heading towards a catastrophic financial meltdown — the sovereign debt crisis. The bubble in government bonds is popping as we speak. Can you imagine the outrage, and civil unrest, when politicians admit that they’ve lost everyone’s retirement?
With their heads (literally) on the line, no doubt the political elite will try and blame someone else for their mistakes. Russia, Syria, Iran and China have already been framed the ‘bad guys’. So it’s easy to see where this is going.
In the years ahead, a major war could blow up in the Middle East, Ukraine or the South Chinese Sea. Perhaps, war could be unleashed in all these hot spots. The emotional and financial damage will be immense. But your portfolio can survive and prosper.
Japan’s sovereign debt default to spark war
To start, let’s wind back the clock…
The Pacific War, dubbed the Asia-Pacific War, was a theatre of the Second World War. As the name implies, it was fought in the Pacific and East Asia.
The turning point came during the Battle of Midway in June 1942. In August 1942, US forces attacked the Japanese in the Solomon Islands. The Japanese fleet sustained heavy losses, and was turned back from the island of Guadalcanal in February 1943.
Allied forces had gained the momentum, moving from island to island. The Japanese, however, successfully defended their positions on the Chinese mainland until 1945.
Today, the war is long over. And, while the world pays its respects to the victims of atrocities, aggression and memories are starting to return between Japan and China. Their economies aren’t in great shape today, and their political leaders are looking to point the finger at someone else for their fiscal mismanagements.
Based on history, Japan is the more likely candidate to start another ‘hot war’.
While you could argue that the Chinese are arming in the South Chinese Seas, Japan has been antagonising the bear for years. When it defaults on its national debt, I expect the Japanese to become more hostile towards China.
Japan’s financial system is a ticking time bomb. Yet, it’s been able to kick the can down the road — domestically it owns 95% of its debt and has US$3.2 trillion in net foreign assets.
Nonetheless, its foreign asset position has declined significantly over the past two decades.
Japan is battling a two-decade deflationary period, driven by its ageing demographics.
At the same time, Japan’s debt to GDP ratio now stands at over 229% — the largest in the developed economic world. Interest rates have turned negative, which has destroyed savers and pumped the government bond bubble. And, to make matters worse, the country’s US$1.4 trillion Government Pension Investment Fund (GPIF) has suffered huge losses and is nearly insolvent. Bloomberg reported yesterday:
‘GPIF will need to buy 4.2 trillion yen ($41 billion) of local stocks and sell 9.8 trillion yen of Japanese government bonds to reach its goals.’
The world’s largest pension fund can’t possibly fund its commitments in the future. For this reason, it’s thirsty for yield and plans to buy more stocks and sell bonds.
The question is: Who will buy their bonds?
We’re at a 30-year bubble in government bonds worldwide, where a staggering US$11.7 trillion of that debt boasts negative yields. When the bubble pops, massive losses will be made by punters who own bonds.
Japan — like every other country in the world — faces a bloodbath in its bond market in the years ahead. And there isn’t long until the ‘detonator’ explodes.
The Pacific War 2.0
With millions of Japanese pensions at risk, the Japanese government has been provoking China for over two years about the Senkaku Islands. China lays historical claim to the islands it calls Diaoyu. But, after being handed them after the Second World War, Japan isn’t backing down.
Tensions over the islands are only increasing. According to the Financial Times on 5 July:
‘A near dogfight between Japan and China — according to the latter, involving the rare use of fire-control radar to target its warplanes — has further escalated tensions between the two powers amid fears that clashes are growing more provocative.
‘The latest clash threatened to turn dangerous, according to a statement by China’s ministry of defence on Monday, when Japanese warplanes used fire-control radar to “light up” Chinese counterparts and released infrared flares during evasive manoeuvres. Japan’s deputy chief of cabinet on Tuesday denied China’s claims.
‘Ian Storey, of the Institute of South East Asian Studies in Singapore, said a radar lock by either side would be a “very dangerous move” because the targeted plane would have seconds to decide whether it was under attack and how to respond. That raises the possibility of accidental fire, something military analysts see as a possible result of the growing spats.’
This is a dangerous sign…
To beef up this issue, Japan’s Prime Minister Shinzo Abe wants to amend the constitution and allow for a more traditional military. The aim is a return to the glory days, when Imperial Japan controlled much of Asia. But the majority of the Japanese people want peace, and remain against the plan.
Constitutionally, Japan is only allowed to have a self-defence force. It signed a pacifist agreement after the Second World War.
But the reality is that it has one of the biggest and most sophisticated militaries in the world. If China or North Korea launches a missile or deploys a jet fighter, Japan will see it first. And an order to strike back will be issued from its command control centre.
Perhaps, similar to Pearl Harbour in 1941, Abe will need to plan a ‘false flag’ attack on his own people. The Americans were against fighting another European War. Yet US President Franklin D Roosevelt reassured Winston Churchill the US would help. In my view, history shows that Roosevelt knew about Pearl Harbour before the attack. But let’s not get into that today…
How to survive and prosper
Tensions are escalating. But, at the moment, politics is dragging this out. With the world nearing a major sovereign debt crisis, it’s highly likely that governments will start a war to distract the people.
If anything happens in the South China Sea, commodities should skyrocket. Legendary investor Jim Rogers says, ‘War isn’t great for much else but commodities.’ For this reason, if you want to hedge your portfolio against war, buy resource stocks. If you pick the best stocks, you’ll make the biggest profits.
The question is: Do you have the time to pick the best stocks?
That’s why I wrote the free report, ‘Three Bounce-Back Mining Belters to Buy NOW’, which was published Saturday. Implementing my top-down approach, I’ve found three resource stocks that could make you massive profits in the months ahead.
Read your FREE report, here.
For The Daily Reckoning
Editor’s Note: This article was originally published in Money Morning.