When Militaries Mobilize
So this is what a new cold war looks like.
Russia put its Northern Fleet on full alert Monday. Nuclear-capable long-range bombers are being sent to the Crimean Peninsula for war games involving 45,000 troops.
Last week, U.S. tanks and fighting vehicles arrived in the three Baltic states that once belonged to the Soviet Union but now are part of NATO. They’ll be stationed there permanently.
At least the cease-fire in Ukraine — ground zero for a proxy war between the U.S. and Russia — is holding for the moment.
While we await the Federal Reserve’s call on interest rates today — the decision is due around the time this episode of The 5 hits your inbox — we turn our attention to the state of play between the U.S. and Russia with the help of our Jim Rickards.
The bottom line comes back to a point we’ve been making here in The 5 for more than a week: The locus of global power is shifting away from the United States. Invest accordingly.
“In early February, I traveled to Washington, D.C., for a private meeting with top national security, defense and intelligence professionals,” Jim tells us.
The setting — a think tank on M Street. Chatham House Rule was in effect. No one could be quoted or cited by name. “But it is permitted to describe the tone and substance of the conversation,” says Jim.
“Included around the table were subject matter experts and former officials from the State Department, Defense Department, U.S. Treasury, White House National Security Council and CIA.”
The central question: Why aren’t U.S. economic sanctions on Russia having the desired effect?
Sure, they’re putting a hurt on the Russian economy. But the Russian government under Vladimir Putin won’t back off its support for the Russian-speaking fighters in eastern Ukraine seeking autonomy from the American-backed government in Kiev.
“When my turn came to address the group,” Jim tells us, “I cut to the heart of our failed sanctions policy. The entire program was an example of a well-known intelligence failure called ‘mirror imaging.’ This arises when an analyst assumes the adversary thinks the way he does.
“Declining GDP and a crashing currency would send most U.S. politicians running for cover and looking for ways to undo the damage. But Russians were accustomed to adversity and used the Western economic assault as a rallying cry. Rather than looking for a way out of the sanctions, Russians took pride in adversity and were more determined than ever to support the Russian-speaking peoples of eastern Ukraine.”
Then Jim posed a thorny question: What, exactly, does the U.S. government want?
“The failure of economic sanctions was not only due to mirror imaging,” says Jim, “but also to a lack of U.S. strategy. The U.S. did not have an endgame in Ukraine apart from wishful thinking about the impact of sanctions.”
To buttress his case, Jim cited Henry Kissinger. “Kissinger said that countries not only need to know what they want but need to know what they won’t allow. Would the U.S. allow Russia dominance in eastern Ukraine? If the answer were no, then the U.S. would need to pursue regime change in Russia.
“If the answer were yes, then diplomacy, not sanctions, would be the best path to a modus vivendi. The policy problem was that the U.S. had neither asked nor answered the question. We were lurching day to day with no vision, no strategy.
“In the end,” Jim concludes, “Russia will prevail because it has the will, the vision and the physical proximity to pursue its interests, while the West does not even have a strong sense of what its interests are.”
“For investors, this geopolitical dead end for the West creates a classic contrarian investment opportunity,” Jim allows.
“Russian ETFs are among the best performing investments of 2015, so far, but have further to go as the situation in Ukraine is slowly resolved in Russia’s favor.”
The Market Vectors Russia ETF (RSX) and the SPDR S&P Russia ETF (RBL) have pulled back from recent highs… but they’re still a darn sight better than the S&P 500…
“RSX and RBL are bets on the Ukraine situation moving toward a resolution and to sanctions gradually being lifted,” says Jim. “Based on my meetings with the national security professionals, that seems the most likely path. The U.S. is not willing to go for the throat, so we will be forced to go for diplomacy.
“That can only favor Putin and Russia in the end.”
Combine these developments with the “de-dollarization” plans Russia is pursuing with China… plus British plans to join China’s version of the World Bank… and the order of the universe you’ve been accustomed to your whole life is shifting rapidly.
It’s not the end of the world, as Jim is wont to remind us… but you do need to prepare your portfolio accordingly or else risk your shot at a secure retirement.
Yesterday, another 100 or so of your fellow 5 readers claimed their copy of the book Jim just wrote to help guide you through the coming turbulent years.
The Big Drop: How to Grow Your Wealth During the Coming Collapse can’t be found at Amazon or any brick-and-mortar bookstore. But we’ll ship you a copy free if you can spot us the shipping and handling. Claim your copy at this link.
Major U.S. stock indexes are adding to yesterday’s losses as traders await whatever the Fed will decide.
The Dow is off a third of a percent as we write — below 17,800. But the small-cap Russell 2000 is nearly flat at 1,241.
Gold is slowly drifting downward: At $1,148, it’s within $10 of last November’s lows.
Crude is tumbling to new six-year lows as traders chew on the latest inventory numbers — revealing a 10th straight week of large increases. At last check, a barrel of West Texas Intermediate fetched $42.26.
Airlines are benefiting from the drop in oil prices… but not as much as you might expect.
“Imagine for a moment that you run an airline,” says our small cap specialist Jonas Elmerraji. “Generally speaking, the airline business comes with some big costs. When times are good, so are profits, but when times get tough, the huge costs of aircraft, crews, insurance and fuel become staggering.
“At Southwest Airlines, jet fuel adds up to a whopping 37% of total operating expenses. So it’s not hard to see why every penny saved on fuel prices adds to Southwest’s share price — a lower fuel price disproportionately affects profits.” Indeed, Southwest is up 49% since last fall.
But that’s not the whole story, says Jonas: “Even though fuel prices have plummeted, most airlines have only benefitted from a fraction of the move. That’s because most airlines today hedge against fuel prices. Hedging usually involves buying complex financial instruments that offset air carriers’ losses when oil prices rise. When oil prices rise, airlines save money on fuel costs, but they also lose money on their hedges.”
Jonas recently spotted a small-cap carrier that doesn’t hedge. If oil prices keep falling, he sees potential gains of 169%. If they rise, “only” 109%. Win-win for readers of Penny Stock Fortunes.
And no, his pick is not Spirit Airlines… which finds its way into The 5 today for reasons that have nothing to do with oil.
Although… back in 2010, just after the Deepwater Horizon oil rig blew up in the Gulf of Mexico, it did have the poor taste to run this ad all over the Internet…
Anyway, five years later, the airline continues to confuse edgy with juvenile. Spirit recently added a new plane to its fleet. It now has 69 total, and it’s launching a $69 fare promotion.
We’re not even going to include a click-to-enlarge to read this ad, because you know what? It’s just not very clever.
Says a Spirit spokesman, “We have a long history of taking major, national news stories, or just things we like to have fun with and connecting them to our marketing. The vast majority of our customers think they’re funny, and accept them for what they are. We realize and accept that a small group of people might not think the same way.”
Whatever. We note here that Spirit ranks No. 8 on a recent list of the “most-hated companies in America”…
“Looks like it’s official,” writes a reader on the subject of accelerating de-dollarization, “that when the dollar goes down the tubes, it will be China who will be having the world money. Hope Obama is happy!”
“The ‘special relationship’ between America and Britain,” writes another, “was really enhanced when Obumbler sent back Churchill’s bust. Don’t think they’ve forgotten that slap in the face!”
“Yeah, Obummer and Brits are real big buddies,” says a third. “He treats Brits like crap. What does nimrod expect? His idiocy HAS CONSEQUENCES. Keystone Pipeline… Libya… Iran… Where does it end with Nimrod in Chief in charge? It doesn’t.”
The 5: Really?
The “de-dollarization” trend we’ve been writing about is not an “Obama thing.” It would be happening no matter who sat in the White House. It’s been building up since Nixon cut the dollar’s last tie to gold in 1971, or, for that matter, the formation of the Federal Reserve in 1913.
“Buying things from Amazon and having them shipped to my home in California sometimes results in a sales tax being withheld and sometimes it doesn’t,” a reader elaborates on a recent thread. “I wasn’t sure why this was until you cleared up the point about the company selling the product having a physical presence in the state being the difference.
“In any case, it is kind of a moot point here since for the last five years or so we have been getting an annual notice demanding that we pay sales tax on anything we USED in the state unless the tax was paid when purchased (scrounging for revenue stream, anyone? And who keeps track of that kind of thing?).
“Apparently, this law has been on the books for decades but was too ridiculous to implement until the need for funds exceeded the threshold for official embarrassment. It typically costs a lot more to have my accountant prepare the return than the sales tax owed.
“This is in a state with one of the highest income taxes, too. I have always personally thought that politicians are a special breed of people, born with skin at least 20 times thicker than normal people. If you want to test this, try making one of them feel guilty about something.”
The 5: Yep. As The 5 noted back in December, California has the highest poverty rate in the country once you account for the higher cost of living. If any Golden State politician ever apologizes for that, we’re sure it will be national news.
The 5 Min. Forecast
P.S. Just in from the Laissez Faire team: They’re organizing a “tax freedom summit” in the days ahead. They’re assembling four of the world’s top tax experts for an exclusive online event to help you keep more of what’s yours.
Watch this space for further details. Until then, here’s a guide to keeping yourself as invisible as possible from the IRS.