Investors are focused squarely on Washington right now, eagerly anticipating President Trump’s tax-cut proposal and fiscal-spending plans, expecting them to juice the markets and our economy.
But as usual, most investors are looking the wrong way and are about to get blindsided: Not by our economy, but by geopolitical events halfway around the world.
It’s not Trump’s domestic policies that will impact markets the most over the next four years. Tax-cut talks and infrastructure-spending plans have already been priced into the markets at this point.
It’s Trump’s most pressing diplomatic priorities that will have the greatest impact on markets.
That’s because there are geopolitical storm clouds quickly gathering over the South China Sea which could choke off global trade with devastating consequences for markets worldwide.
The South China Sea dispute has been on my radar for over 13 years, back when nobody, and I mean nobody, else was talking about it. I warned readers in Real Wealth Report as far back as 2004 about this potential powder keg, but just to recap:
A tiny group of barren coral reefs in the South China Sea, the Spratly Islands, is ground-zero for this dispute. China has long claimed sovereignty over the area, which is disputed by Taiwan and Vietnam. To make matters worse, Malaysia, Brunei and the Philippines also lay claim to parts of this uninhabited archipelago.
The only reason why these five nations give a hoot about this desolate group of coral reefs and sandbars is because they sit atop 100 billion barrels of undeveloped crude oil reserves — equivalent to nearly 10 percent of total current global reserves — plus another 882 billion cubic feet of natural gas!
No doubt about it: That’s a huge economic prize.
Also, these islands sit astride the world’s busiest commercial shipping routes, which makes the South China Sea a strategic prize for China to get their hands on.
As if the Spratly Islands aren’t enough of a flash point already, there’s another area of contention between China and Japan further north in the East China Sea: The Senkaku Islands, which Beijing and Tokyo have been fighting over for decades.
Already sporadic scuffles have flared up over the years between the crowded field of claimants to these islands, but it hasn’t blown up into a major conflict … at least not yet.
Recently however, tensions have escalated with the U.S. getting more directly involved in what could be a military face off with China in the disputed region.
Three years ago, China began dredging up sand from the ocean floor to build up the Spratly Island chain into a fortress.
Altogether, China has reclaimed more than 3,000 acres of land in the islands since 2014. Recent satellite photos clearly show seven artificial islands in all, fortified with gun towers and anti-aircraft missile batteries.
Plus, China has built military airstrips, port facilities and barracks for troops to be permanently garrisoned in the disputed islands.
The Obama administration lodged objections to China’s military island building, and the U.S. countered the buildup by expanding the Navy’s presence in the region and by stepping up American missile capabilities in South Korea.
Ostensibly, the missile defense installation in South Korea is a deterrent to Kim Jong-un’s saber rattling in North Korea. But Beijing knows full well these missiles could be used against them as well, and they’re not happy about it. China’s military brass responded just last month by announcing it would deploy intercontinental nuclear missiles within range of U.S. targets!
China upped the ante by announcing its intention to send nuclear submarines on patrol in the islands to “deter” U.S. warships. There have already been a series of minor skirmishes between U.S. and Chinese military forces in the region. But now tensions are building.
In 2001 a U.S. Navy P-3 Orion reconnaissance plane collided with a Chinese F-8 fighter jet over the islands.
Chinese vessels have repeatedly harassed Navy surveillance ships and drones operating in the area.
In 2009, a Chinese submarine collided with a sonar buoy being towed by a U.S. destroyer.
And, again, just last week, there was another close encounter between a Navy P-3 and a Chinese surveillance aircraft.
Why are tensions
It has everything to do with the new Trump administration, which is drawing a hard-line in the sand against China in this dispute.
Trump’s new secretary of state, Rex Tillerson, took a bare-knuckles tone against China in his Senate confirmation hearing when he said: “We’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed.”
As the former CEO of ExxonMobil, Tillerson understands the strategic importance of the South China Sea all too well. More than 15 million barrels of crude oil gets shipped through the region on a daily basis as tankers from the Middle East make their way through the Strait of Malacca between Malaysia and Sumatra, then turn north to unload their cargo at ports in China, Japan, South Korea and Taiwan.
That’s currently about 50 percent of the world’s oil tanker traffic — and by 2035 it’s expected that 90 percent of Middle East fossil fuel exports — will pass within easy striking distance of China’s missiles, bombers and ships stationed in the Spratly Islands!
You read that right: 90 percent!
Meanwhile, the Trump administration has made it crystal clear they will not tolerate a Chinese takeover in the South China Sea. Sooner or later, something’s got to give.
Trump is also a big proponent of fair-trade deals, taking specific aim at punishing China for currency manipulation that gives Beijing an unfair trade advantage with America. And when it comes to keeping maritime shipping lanes open, there is none more important than the South China Sea.
Every year $5.3 trillion of global trade passes through these waters, with U.S. trade accounting for nearly 25 percent of this total.
So it’s clear that China’s Spratly Islands fortress is a major thorn in the Trump administration’s side. It’s no wonder why the risk of armed conflict in the South China Sea is now more significant than ever before.
Expect the saber rattling to pick up from both Washington and Beijing in the very near future. The U.S. has mutual-defense packs with allies in the region including Japan, Taiwan and the Philippines. Which means that any missteps from any one of these nations could draw the U.S. military into a shooting war with China.
If, for example, a Philippine naval or coast guard vessel is attacked, a military aircraft is shot down, or any members of its armed forces are injured or captured, this would immediately draw a U.S. military response under the terms of our mutual-defense agreements, as is the case with NATO.
Countdown toward war …
I hate to say I told you so but … the ramping up of the war cycles, which I’ve been warning you about, tells me to expect open conflict in the South China Sea sooner rather than later.
Here are the red flags I’m watching for in the countdown to conflict in the region …
First, China clearly intends to exert greater control over the South China Sea for two reasons, one economic, the other strategic:
- Enormous untapped oil and natural gas reserves, plus …
- Strategic maritime trade routes that run right through China’s front yard!
Second, up until now, Washington has been asleep to this threat, just as they were with the Japanese 76 years ago right before Pearl Harbor. China has been emboldened by its easy, cost-free conquest in the Spratly Islands, and it’s now eager to project its military might across the entire region.
Third, once China has built up its military presence on the islands to the point it achieves maritime and air superiority over the region, I expect Beijing’s next move will be to declare an air defense zone, just as China did four years ago in the East China Sea dispute with Japan.
Fourth, in response to China declaring a defense zone over the Spratly Islands, the Trump administration — because of its hard-line rhetoric — would have no choice but to respond in kind. Most likely the U.S. Navy’s 7th Fleet would be dispatched to the region, probably to set up a blockade of the disputed islands, just like what happened during the Cuban Missile Crisis 50 years ago. And that conflict almost ended in nuclear war!
Considering his constant bluster about China, I seriously doubt President Trump would back down if the U.S. or its allies are provoked in the South China Sea.
Since WWII, the U.S. Navy has kept the peace in the Western Pacific. Our allies and key trading partners in the region look to the U.S. military to maintain open sea lanes and shipping routes and to provide stability in the region.
If Washington blinks, they would lose all credibility with every nation in Southeast Asia.
And if our allies in the area lose confidence in our ability to protect them, they will simply embark on a dangerous arms buildup of their own. Or even worse, cozy up to a more powerful China, which hands Beijing strategic and economic dominance over the entire region — home to the world’s fastest growing economies.
Either way, it’s a lose-lose situation for the United States, which is why Trump will never back down.
If you’re a student of history, as I am, then you’ll realize this confrontation is inevitable. Five hundred years ago, the Spanish ruled the sea lanes to the New World, before they lost dominance to the British.
Two hundred years ago, Britain’s Royal Navy ruled the waves, and the key trade routes around Africa to India and East Asia.
In the 20th century, especially since the end of WWII, it’s been the United States Navy that has ruled the seven seas.
Well, in the 21st century, inevitably China will not only become the world’s biggest economy, but it will become a dominant force to be reckoned with in the Western Pacific.
Basic Survival Strategies
One blue-chip American company is uniquely positioned to profit from a possible conflict in the South China Sea, as well as the overall defense-spending buildup that’s expected under President Trump: Textron Inc. (TXT).
TXT is one of the largest defense contractors in the United States with $13.8 billion in total revenue, and earnings growth of 11.45 percent over the past five years. And a large share of TXT’s revenues and profits come from its Textron Systems Marine & Land Systems division, a key supplier to the U.S. Navy and Marine Corps.
The division designs and builds maritime craft for military operations at sea. This includes landing craft as well as autonomous, remotely operated, unmanned service vessels. Seaborne weapons systems will be in very high demand in any conflict that involves the U.S. military in the South China Sea.
That’s why the stock is my top-pick for this month’s Real Wealth Report portfolio.
My recommendation: Using 3 percent of your capital allocated to Basic Survival Strategies, buy Textron Inc., symbol TXT, at a limit-price of $50 or better. I will monitor the risk for you, via a mental stop I will hold.
Now, let me update you on your existing positions …
I know I sound like a broken record, but continue to steer completely clear of the riskiest market of all — sovereign debt. This includes municipal bonds and corporate debt that’s rated less than AAA. After a small bounce, bonds should continue their downtrend.
And as strong as the Dow looks, do not go all-in on stocks. There will be a better opportunity to get long stocks, so wait for my signal.
For now … FIRST, continue to hold your physical gold as recommended. As a reminder: You should have bought on my previous recommendation at $1,207 and more recently at $1,250, 10 percent each time, your average is roughly $1,228.50. That means you should soon be in-the-money on these purchases.
Gold is forming a nice uptrend off the December low, and it’s holding nicely around the $1,220 level. The next near-term upside target is $1,250, then of course the $1,300 level. After that, I will be looking at the $1,380 level, then a break above $1,470. In fact, I will recommend adding to your physical holdings as soon as these buy signals are elected. Stay tuned.
Remember, these are long-term core emergency holdings. And if you followed my recommendations on these buys for 20 percent of 20 percent of the Basic Survival Strategies section, your total allocation should be no more than 4 percent of your entire liquid net worth (20 percent X 20 percent).
If anything changes, or I decide you should hedge your current holdings, rest assured I will notify you immediately in Real Wealth, or via a Flash Alert if necessary.
Continue to hold your …
nCore Gold Bullion (GOLDS), up 215 percent since originally recommended.
nSPDR Gold Shares (GLD), up 173.6 percent since my initial recommendation.
nTocqueville Gold Fund (TGLDX), up 51.4 percent.
SECOND, hold your Platinum Bullion (XPT) and Palladium Bullion (XPD), which should be very minor in holdings.
THIRD, for spot silver: You should have 5 percent of your Basic Survival Strategies funds invested in Silver Bullion (XAG) when it hit $16.30 on November 23. You’re up 9.2 percent on this buy. Hold. I will let you know when to add-to, or hedge the position if need be.
FOURTH, continue to hold Yamana Gold Inc. (AUY), Goldcorp Inc. (GG) and Kinross Gold Corp. (KGC) — with good-till-canceled protective sell-stops at $2.34 … $11.49 … and $2.25, respectively.
I’ll be looking to add to these positions soon, once my key buy signals are elected, as stated above.
Plus, I’m constantly scanning my watch list of high-quality miners with low production costs for new potential buy recommendations. Stay tuned, because I expect to add substantially to your mining stock holdings this year.
FIFTH, keep holding your shares in Vantiv, Inc. (VNTV) with a good-till-canceled sell-stop at $49.74.
If not on board, for whatever reason, using 3 percent of your capital allocated to Basic Survival Strategies, buy Vantiv, Inc., symbol VNTV, at the market. Place a good-till-canceled sell-stop at $49.74.